Uncertain Market Direction Reaching Historic Levels

 
It seems U.S. investors can’t make up their minds. 

One day, stocks pull back a full percentage point, only to recover all of those losses in the very next trading session. In fact, that very thing has happened twice in the last month.

Overall, since a nice run-up in February took the index above 2,100 for the first time ever, the S&P has scarcely moved, rising no higher than 2,130 points and falling no lower than 2,040 points. The range has grown narrower over time, with 2,080 acting as support since early April.

SPX, S&P 500 Large Cap 

That constant tug-of-war between the bulls and the bears has been a recurring theme of late. And the back-and-forth market direction has reached historic levels.

Last month, the S&P became so range-bound that, according to Bespoke Investment Group, the standard deviation of the index’s closing prices over 50 days dropped below 1% of the index’s 50-day moving average. 1995, 2005, 2007 and May 2014 are the only other times that has occurred over the past two decades.

When will investors make up their minds? It’s impossible to know. All we know is that stocks won’t trade sideways forever. Eventually, a breakout will occur as the pendulum finally swings to one extreme or another, and a clear market direction will emerge. But which direction?

That too is unclear. Results from the four similar narrow trading periods are decidedly mixed. After the range-bound trading in 1995 and 2005, stocks broke higher; the 2007 narrow trading range, however, was followed by one of the biggest collapses in the history of the stock market.

Perhaps last year’s breakout is the most instructive, if only because it’s the most recent example of an extreme sideways market.

From February 14, 2014 until May 22, 2014, the S&P traded between 1,815 and 1,897, a 4.5% band that is only slightly less narrow than the 4.4% band the index has been locked in since early February. When stocks finally broke out of that band, they broke to the high side, advancing 6% in six weeks and breaching the 2,000 level by early September.

Of course, stocks haven’t made a ton of progress since, with the benchmark index still hovering near 2,100. So last summer’s “breakout” hasn’t proven to be very sustainable.

The truth is, stocks have been largely up and down for more than a year following the major post-recession rally, with no definitive market direction. Who knows when a breakout will come—or which direction the market will turn when it does.

That uncertainty may be unsettling. But there are ways to invest smartly in this choppy market, according to Mike Cintolo, Cabot’s Vice President of Investments and chief analyst of our Cabot Growth Investor and Cabot Top Ten Trader advisories.

“I think there’s both plenty to like and plenty to be careful about,” Mike says. “I think just remaining patient is the best course, until we enter a defined trend. Until then, there are still plenty of stocks and sectors that are working, but I’m advising a somewhat cautiously bullish stance.

“Hold some cash, honor your stops and be choosy on the buy side. At the same time, if you do see a good setup in a stock with a great growth story, go ahead and take it.”

In other words, don’t let months of uncertainty sideline you. Eventually, the market will make up its mind. It always does. In the meantime, there are profits to be made if you look in the right places.

After all, an indecisive market—even a historically indecisive one—is far better than a down market.

 


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