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Are We Headed For a Range-Bound Market?


Yes, with the upper end near the recent high of around 1,120 and between 1,000 and 950 for the lower end.

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One hypothesis that I've been working with, which I've mentioned in this forum since October, is that technically speaking, the current rally phase of the S&P may exhaust itself at around the 1,100 area. It will probably take extremely good news to propel the market significantly beyond this level.

On the other hand, many investors/traders have been left behind during this rally and they'll probably be feeling "lucky" to "get in" if the market were to correct 10% to 15%. Thus, I'd expect significant support for the market at around those levels.

It's currently my view that probabilities favor the establishment of a range-bound market for several months. I believe such a scenario could manifest with a range established at the upper end somewhere near the recent high of around 1,120, while the lower end of the range will probably be established somewhere in the 1,000 to 950 area.

It may be interesting to note that according to my valuation work, S&P 1,100 is at the midpoint of its historical valuation range. Historically speaking, 950 is at the lower end of the "normal range". One might posit that due to current circumstances (higher debt, slower growth, etc.), a "new normal" could be established in which 1,100 should be near the upper level of a fair valuation range. 950 could be established as a new midpoint.

I think it may be necessary for the market to "explore" such possibilities while the definitive evidence is tallied up about the sustainability of the current recovery.

In other words, fundamentals support price indecision manifested in the form of the establishment of a trading range.

Furthermore, higher discount rates and risk premiums support a "sub-normal" valuation range relative to historical parameters.

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