Why the market remains rangebound.

The S&P500 slipped for a second day as it continues to struggle with 2,160 resistance and the 50dma. Volume was above average, but average is relative since it is calculated using the last 50-days of painfully slow summer trade.

The market crashed under the 50dma in early September as traders woke from their summer slumber just as the Fed started hyping the prospects of a rate-hike. While it was a brutal 2.5% selloff, bears haven’t been able to do much since. Volatility has definitely picked up, but we remain stuck in a sideways market.

Directional moves happen when people change their mind. When bulls become less bullish and start selling, or bears become less bearish and start buying. The reason we remain range bound is bulls are stubbornly bullish and bears are stubbornly bearish. The Brexit bears haven’t been able to do anything with those headlines, while the no-rate-hike bulls haven’t been able to move the needle either.

The high levels of intraday volatility come from a small group of traders that overreact to every headline and gyration. While they bounce back and forth like a ping-pong ball, no one else is interested in joining them. The vast majority of the market is content with their positions and over-caffeinated talking heads and sharp price moves are not changing that.

Supply and demand are fairly balanced because sentiment is similarly balanced. When the crowd gets overly bullish or bearish, we setup for a snap-back. Reversals from unsustainable levels are quick and decisive. But the trade over the last several months has been anything but quick or decisive. That tells us prices are sustainable and not overbought even though we are within shouting distance of all-time highs.

While the market suffers from a serious lack of demand every time prices move to the upper end of the 2,100s, I still give the edge to the bulls. There have been more than enough spooky headlines to send us tumbling into the abyss. Instead owners shrug off every bearish headline. Whether rational or not, when owners don’t sell, supply remains tight and prices firm. As long as owners are confident, expect selloffs to stall and bounce like they have all summer.

The next big bogie on the horizon is third-quarter earnings. While this is a multi-month event, over the next couple of weeks we will know if there are any systemic problems hiding under the surface. Even with as few as 10% of the companies reporting, we will have a good sample of the overall economic conditions. If there are serious problems, we will know by then.

If third-quarter earnings don’t kill us, expect the stable trade to seduce underweight money managers to start chasing stock prices into year-end. September’s 2.5% selloff priced in the inevitable rate-hike, so we no longer need to fear that. Anytime the market slips to the lower half of the 2,100s, treat that as a buying opportunity. If we were vulnerable to a crash, it would have happened by now.

Of course the significant disclaimer is as long as nothing new and unexpected happens, like a surprise Trump victory. If that happens, all bets are off and we need to reevaluate. Most likely that will be another dip buying opportunity, but the key is figuring out how low we go first.

Jani

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