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Further Evidence


Yesterday provided more evidence of the trading range environment that I have been suggesting the markets are currently in. The market opened very strong and it was obvious by the quickness of the flickering ticks that shorts were covering and longs were scrambling "to get in." The opening half hour proved to be the high of the day as there wasn't enough conviction to carry stocks through the upper end of the trading range.

At current valuations, there has to be some resolution of the geo-political events or indications of a significant improvement in demand by consumers and businesses to argue that stocks should go (and stay) higher from current levels. In addition, at current valuations, there has to be some proof that the November Fed rate reduction and upcoming stimulus package will have a limited impact on improving economic and therefore corporate profit growth before expecting conviction on the downside.

The market is still in a period where neither the bull or bear case can be proven right or wrong and therefore each move - in either direction - is greeted with skepticism and therefore faded by the trading community. What is this period called? All together now people --- the twilight zone.

It hasn't just been the markets that are in a trading range, the Volatility Index (VIX) and Government 10-year note yield are also in a trading range and are hovering near levels where stocks have gone into a corrective phase.

Again, this is going to be a volatile week because of all the economic and earnings news coming out beginning with Retail Sales and Intel's quarter today. The various indicators that I use don't suggest that the market is poised to go down significantly, they simply suggest the upside may be limited.

This morning while I was on CNBC's Wake Up Call, Liz Claman asked the best question; "what should an investor do in this environment?" I answered that the best move right now is patience where investors wait for a break above the trading range or a move back toward the lower end of the trading range before adding to positions. It is essential for the market to signal a time for higher conviction in either direction before I suggest the same. The one fact of investing that I know to be true is that the market is smarter than I am.
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