Insights & Advice

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The Trouble with Trading Ranges

We have been stuck in a trading range since early November. It is the most extended period of narrow, sideways trading we have experienced since hitting a low on the S&P 500 Index of 666 back in March. Since then the index has rallied 62%. That’s the largest gain for the S&P since 1933. Normally, a period of ‘distribution’ like we are experiencing now, where buying is waning while selling is intensifying, should tip off investors that a correction is coming. But times are far from normal and the action is inconclusive for a variety of reasons.

For one thing, the market is giving us many chances to sell “at the top”, if that top is truly 1100 (or higher) on the benchmark S&P. I count at least nine times we’ve hit a new, yearly high above 1100 before falling back since the middle of November. Markets don’t usually give us that many chances to take profits before correcting.

What would normally occur is a sharp decline, sparing no one in the market, a sort of “take no prisoners” kind of thing followed by a brief, half-hearted rally attempt and then another whoosh downward. That’s not what we’re seeing. Instead, the market falls; there is a period of sideways action and then another attempt at new highs. So why is all this important to you?

I’ve written in the past several columns that it is the kind of atmosphere where readers should consider taking some profits. Personally, I believe the S&P 500 can rally as high as 1,150 before incurring a serious correction. However, forecasting is an art not a science.

Early last year, for example, I predicted oil would hit $128-130/BBL. I sold when that happened and advised you to do the same. Oil continued to run before peaking in the mid $140s. At the same time, I thought the S&P would fall to 684 before the correction was over. It bottomed at 666. Once again, close but no cigar. In the past month, I suggested you take profits in gold above $1,200/ounce. Yes, I still think gold can see $1,300 before all is said and done, but the point is I believe both buying and selling securities should be a process. You ease in and you ease out as circumstances dictate.

The S&P 500 reached 1,119 intraday on December 4th. That’s only 31 points, or 2.6%, from my target high for this leg of the bull market rally. That’s close enough for me. Remember that from January to early March, the markets were down quite a bit. You may have sold at a loss back then and then re-invested. If so, you should compute your gains and losses. Harvest those profits you need to cover your losses. This exercise has to be done within the next 19 days. Next year will be too late.

Taking profits, especially in December, does not mean I have turned bearish on the economy or the markets over the medium and long term. Far from it, I believe both have a sunny, if somewhat volatile, future ahead. I’m just acting as any prudent investor would if they have been long this market since March.

Posted in A Few Dollars More, At the Market