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Conviction in the range


Good morning and welcome back to another day filled with "key" events that are sure to be used as reasons for volatility in the markets. While I know that you are all probably sick of how many times I refer to the current trading range as the twilight zone, it is important that I keep repeating it. Not necessarily for your sake, but because I must remind myself, especially when the emotion of the day or week is getting in the way. Just as the market looked like all it needed a couple days ago was a little more good news to break out of the current trading range, we get just that - some potentially good news from Intel (INTC). Or was it, given the companies guidance on capital expenditures? Remember that in the twilight zone EVERYTHING is so mixed that it is impossible to prove the bull or bear case.

While I was guest hosting CNNfn yesterday with the vivacious Rhonda, we chatted about both the bull and bear camps. In about 2 minutes of airtime, we discovered that I could make an equally compelling case for both camps (probably was more confusing to viewers than strategists normally are!). This likely meant that there is very limited conviction either way right now because the positive and negative arguments that have been with traders and investors over the past year continue to remain firmly in place.

On the negative side we have the current news; the economy remains soft, earnings growth is coming from cost cutting only, valuations are fair at best, there is risk of deflation, the geo-political backdrop is dicey in Iraq, North Korea, Venezuela, and consumer (and investor) sentiment is trending lower. The current negatives are enough to keep the bulls in check once the market becomes overbought.

On the positive side we have the forward looking news; the Fed rate cut last November should aid economic growth, there is some level of stimulus coming from Washington, history suggest a fourth down year in a row hasn't happened since the Great Depression, the third year of a Presidents term has always been up since FDR's administration, valuations may not be expensive considering the low level of rates and finally, one if not more of the geo-political problems should be resolved over the next few months (one way or another), which would remove some level of uncertainty. The forward-looking positives are enough to keep the bears in check once the market reaches into oversold territory.

No matter what your view is, the counter argument is good enough to limit any conviction and therefore prevent pressing a direction. Those that are negative don't press the downside and those that are positive don't press the upside. Eventually it will change and the range will be broken, but that should only come with time and the elimination of a compelling argument on either side. For the time being, the market as defined remains overbought and is closer to the upper end than the lower end of near-term trading range. How you react to it is based upon your own time frame, style and risk tolerance. The near-term range on the S&P 500 remains 875-945. A move to the lower end of the range (which I expect) would likely create an oversold condition and set the stage for a bounce back to the upper end of the range.

Trust me when I tell you, it will feel like the tape is about to breakdown and crater when we get to the lower end. Kinda like it felt that the market was going to spike higher a couple days ago. The key is to remember that if and when we get there.
Going back to CNNfn today to hang with Rhonda...don't worry Daisy, we are just friends!
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