Why We May See a Dull Market into 2017

No doubt about it, this market is as dull as dishwater. Stalking the technical setups on my watch list has been about as exciting as watching the grass grow. In fact, according to the Trader's Almanac the recent 7-week stretch of very tight market action -- a 1.7% day to day range maximum on the S&P -- which only broke last week with a downside move, was the tightest range-bound market for the longest stretch since the late 1920's. Wow!

The problem here is that there are too many competing influences vying for their share of the market pie. Competing vectors tend to cancel each other out, yielding indecisiveness among market participants and hence, you guessed, it, trendless, range-bound, dull and boring market action.

Consider the reasons why this market should be moving higher:

  • All major indexes are in long-term uptrends with periods of consolidation
  • The economy is at full employment and still growing
  • Commodities have made a strong comeback in recent months
  • The election season is likely to increase interest in infrastructure spending
  • The Fed has been accomodative
  • Housing markets is strong and getting stronger
  • Consumer spending is still strong
  • US leaders like AAPL and AMZN are hitting highs and showing strength
  • Asian markets have been strong
  • European markets are rebounding

Now consider the reasons why this market should be moving lower:

  • All major indexes are overbought long-term and in need of a sharp pullback
  • Consumer prices are rising putting a damper on spending habits
  • Personal income has not grown significantly for several years
  • The election this year is a strange one and should worry investors due to uncertainty
  • Market breadth has been narrowing in recent weeks
  • Historical PE ratios show that current valuations are on the high side
  • Tension in the Middle East and North Asia should rattle investors
  • The threat of domestic terrorism has never been higher
  • The Fed has only raised rates once in 5 years and is overude a cycle of hikes
  • Brexit may be followed by other countries leaving the E.U.
  • Several European economies are shaky at best and could default on loans

None of the items on either list are going to be resolved within the next 2 months, and most will continue to be a factor far into 2017. Hence, the bull-bear battle looks likely to continue for some time yet, at least until the November election. The Fed has 2 meetings before then, and odds favor no hike in rates until December, at least. But with every Fed speech we will continue to see a great deal of confusion about what the Fed is signalling to investors.

It is best, then, to prepare for more choppy trading of the type we are seeing today...and saw last week, and for the 7 weeks before that. Market action like this that we've seen so far today:

Given this envionment, here are some tips to playing the markets safely and profitably:

  • Forget daily charts; drill down to the intraday action and trade that
  • Keep tighter stops and take profits more quickly
  • Cut your losses quickly (always a good idea)
  • Stay diversified in a variety of industries and market sectors
  • Keep position sizing small
  • Consider playing both sides of the market, long and short

All the best. Happy trading, TC

Dr. Thomas K. Carr (aka "Dr. Stoxx")

Founder, CEO of DrStoxx.com and IXTHYSLetter.com


Posted to Dr. Stoxx Options Letter on Sep 19, 2016 — 8:09 PM
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