What does every investor and trader want to know? Where the market is headed.
But to figure that out, we first must comprehend what’s taking place now, and how that could impact the immediate future of the market.
Here’s what I expect after making sense of the market this month…
From the middle of October through the end of November, the market roared from a pullback level of 1,862 on the S&P 500 (SPX) to a record high of 2,079.
Then came the beginning of December…
And that’s when another market correction sent the SPX back down to the 1,972 level.
So why did it drop off all of a sudden?
To put it simply, the market was overextended and was therefor due for a pullback…a HEALTHY pullback.
The SPX simply couldn’t keep climbing at that pace forever. For an index that rarely makes it above the 70-mark in terms of relative strength, it spent a whole week above it towards the end of November.
The other evidence we have of how overbought the market was is the Volatility Index (VIX) which we can see here thanks to Stockcharts.com:
You can see that the VIX was below the 12-mark just before the December pullback started.
At that point, the VIX was telling us that it couldn’t go much lower, and like a rubber band, it was ready to snap back the other way.
It did just that as it returned to healthier levels, but came at the price of a market pullback.
By all accounts so far, this December pullback was a healthy one. It was severe enough to do some damage to portfolios, but as you can see on the far right of the VIX chart, the market is already back to its bullish ways.
As the market goes up, the VIX falls, and vice versa. So I expect the market to continue its climb (as it’s given us no reason to believe otherwise) until it becomes overextended again.
At that point, another correction could be due.
And if anything new or out of the ordinary occurs, I’ll be here to let you know about it.
