Where is the Stock Market Headed?

“Overall, based on my current assessment, I expect the Dow to remain in a broad trading range between ******* to ******* for the remainder of the year. More specifically, I expect the Dow to remain in this range for 90% of the time, with a bias towards the ******* half of this range.” 

“As we move into the second half of the year, I expect the combined impact of high oil and commodity prices, Japan, and rising inflation to weigh on the market.

However, rather than a reversal of economic and earnings momentum, I expect the combined effect of these variables to scale down the market upside first discussed in a market update released in mid-February (I discussed this downward revision recently).

To clarify the last paragraph for those who are more recent subscribers, in other words, rather than a Dow *******, I expect a trim down to ******** due to the issues that will materialize in the second half of 2011.”

“The final two charts in this series illustrate how the Dow continues to remain within a very steep bullish trading band. Notice the ******** made in the Dow between ******* (fourth chart) and ******* (fifth chart). This is a very ******** move as mentioned. However, it also increases the chance of at least a 4%-5% correction in coming days.

So what should you do?

I would not be adding any new money into the market at this point. I would wait for a correction.”

We also stated that you might want to sell some positions to avoid the expected downside (exact quote not included because it points to our longer-term forecast in the market).  

Despite the continuation of earnings surprises, I still feel the market is overvalued by a very large amount because it has rallied strongly in response to earnings reports. But once again, the valuation methods I focus on are best utilized to forecast market bottoms during bear markets.

On the other hand, I also look at more traditional valuation metrics such as PE ratios and so fourth in order to gauge market sentiment. Market valuation techniques alone do not help us much. You must also look at sentiment because it can help you spot trends early on.

If you are not able to gauge market sentiment and you are aware of the macroeconomic risks (of which there are many) then you could be sitting in cash for ten years waiting for a collapse while the market soars. This is the precise situation many investors have found themselves in after listening to the perma-bear snake oil salesmen plastered throughout the media.

At the same time, many investors who have listened to the perma-bulls have found themselves selling towards the bottom (in panic) and have only recently bought back into the market.

There are numerous methods to determine earnings and valuation, so it is very important to understand what the majority of institutions utilize as so you can determine if they will be disappointed or pleased with the data.”

“So how do we play this?

The higher the Dow is going into the second half of the year, the more **********, and vice versa. 

If the market corrects downward (in advance of these risks) going into the second half of the year (say back down to the ******* level), I would be a strong ******* of US equities (a correction down to the ******* level would add to this ****ish strategy).

In contrast, as the market ************************, you should *************************.”

"Currently, the market is entering the second half of the year already having corrected by around 5% over the past two weeks. Thus far, this correction has not been significant relative to the anticipation of an economic slowdown in the eyes of the consensus of investors.

The current ~5% correction seen over the past month is **********************. Thus, I expect ************ over the next few weeks. 

I feel the odds are quite high (85% certainty) that we will see (the Dow Jones reach) ********. That would place the DJIA at *******.

In addition, the odds are fairly high (70% certainty) that the DJIA will head to******** from here. Finally, I estimate a 50:50 chance that the DJIA will ****************, placing the Dow at ********."