Market Outlook: Expecting a Pullback

 |  Includes: DIA, QQQ, SPY
by: Sean Hannon

My long-term view of the stock market is both consistent and clear. Believing that economic growth will remain low for many years, a protracted trading range will allow nimble traders to prosper as the buy-and-hold investor sees limited gains. Only buying when prices have fallen consistently, riding the eventual recovery higher and selling at the top of the trading range will allow investors to increase their wealth and improve their living standards.

As a vocal proponent of a long-term trading range, the investment approach is simple. Monitoring the tone of the market allows us to trade within set confines and register a series of small gains that compound into a large sum. Having executed this strategy in this newsletter, we have demonstrated that slow and steady wins the race.

From a publishing perspective, the trading range provides a challenge. Facing an environment where prices go higher one moment and lower the next, patterns prevent me from consistently creating catchy metaphors to describe each new development. When wit and wisdom fails, I revert to staid descriptions of what is and what will come.

Now is one of those times. After September’s historic rally, we are in familiar territory. The stock market burst higher on little more than euphoric hope and has returned to a price level where it is over-loved, over-valued, and over-owned. With the third quarter having ended and earnings season ready to begin, a test of hard data versus eternal hope will be waged.

Unless companies begin reporting a strong rebound in growth that indicates the economy is recovering, all the thoughts of the Federal Reserve (Fed) using a quantitative easing (QE) strategy to print our way to prosperity is useless. As I have said many times in the past, QE made lead to temporary increases in asset prices, but those gains are temporary. Only hard work, diligent savings, and intelligent investing can create true wealth. If not, everyone central bank would crank the printing presses, poverty would vanish, and all would live in a land of comfort without having to expend even the most minimal effort.

Over coming weeks, I expect this reality to push prices lower. We may see the S&P 500 tick toward the April highs, but those gains will be short lived. Instead, the economic reality will weigh on the market and push prices lower. To those remaining long with the hopes of squeezing an additional 5% from this market, I wish them luck. I will not be along for the ride. Instead, my investment strategy remains nimble and will reduce risk while continually searching for new opportunities. Some may deride the approach as slightly boring, but I am unaffected. We do not invest for the excitement for the trade, but for the growth of our capital.