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The Zone


Today provides another example of how the twilight zone works. Since the early December peak for the market, there has been a few times where the equity market appeared as if it was going to breakdown (ie, last week,) only to spike higher. There have also been a few times when the market looked as though it was going to break out and go up big (ie, yesterday) and fall back down.

The reason for these head fakes is that there is very little conviction among bulls or bears because, as I wrote about yesterday, both make a very compelling case. Each time the market makes a move, reasons are given that can be misleading. Take for example yesterday. The market was up because of the coming stimulus and signs that the economy (recent ISM report) and earnings (lack of pre-announcements) were beginning to turn. If that were true, the market would not be getting smacked in the early going because we know the current environment is weakish, but are looking forward to better times ahead. If there were real conviction in the bulls camp current numbers would represent more of a non-event.

The bottom line is that the market is in the twilight zone trading range and the indices and its components are closer to the upper end of the range and are overbought. The range on the S&P 500 should be 880 - 930. I would expect it to move back toward the lower end at which point pessimism would likely move up a bit and the markets would become near-term oversold.
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