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Calling the Market: Difficult, but Not as Hard as Making a Strong Bullish Case

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Here's why one investor expects a volatile market with a downside bias until there is resolution about the election and Europe takes a hit.

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MINYANVILLE ORIGINAL

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

This morning, Minyanville asked a noted investor where he would call the market. After requesting anonymity (we'll call him Dr. JK), he said it was tough to give a call in just a few words, but he would give us a longer answer which would explain what he's factoring into any answer he might give. It's always valuable to know how an expert thinks, and so we share with you his answer below.

Here is the good news:
  • Solid private sector employment growth, no help from housing (yet), and public sector headwinds, but very solid in services and manufacturing.
  • Banks loans to small business are growing steadily (first time since pre-crisis).
  • Low inflation, cheap electricity (gas and coal), low interest rates, mortgage rates are under 4%!
  • Auto sales back over $15 million/year!
  • The housing market has bottomed! (Yep, you heard it here first – or at least early.) Doesn't mean it's going up, but it's not going down anymore.
  • Corporate balance sheets are flush.
Here's the uncertain news:
  • Corporate profits and margins are near record levels. Can they be increased or even sustained?
And the bad news, as someone aptly highlighted:
  • Europe is a basket case with France going socialist again, Spain in the tank, and no government in Holland. But, some of this is baked into the market.
  • Washington, DC: Yawning deficits, regulatory headwinds, an administration that doesn't understand business or its importance, a Federal Reserve that has too many mandates, and the Bush tax cliff in '13.
Summary:
  • Very difficult to call, but harder to make a strong bullish case.
  • My best guess is a very volatile market with a downside bias until there is 1) resolution about the election; and 2) Europe takes a hit.
Hints:
  • Bond market vigilantes: If 10-year Treasury yields break above their 1.8-2.4% range, we're in a bull market.
  • Europe needs to sell off and the DAX (^GDAXI) is forming a head and shoulders top. If we break downward through the neckline (around 6450) with increasing volume, then the downside will be around 5800-5900. That could be a major buying opportunity, if there is any progress in Washington (see chart below).

Rather than "sell in May and go away," I'd say, "much too hard to trade with perfection, so take a break 'till after the election!"

In short, I see the market as bearish through the election cycle, but don't expect a crash, just increased volatility with a downward bias. Figure 1450 on the upside to 1275 (Strong support and Fibonacci retrace from the summer 2010 lows) on the downside for S&P (^GSPC). I'm a seller 1400-1450 and a buyer 1275-1325.

Twitter: @Minyanville

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No positions in stocks mentioned.

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