Stock market set for showdown between bulls and bears

In a landscape devoid of blockbuster earnings and policy catalysts, the stock market is likely to remain vulnerable to political uncertainty, setting the stage for another round of skirmish between the bulls and the bears.

And while the outcome of this battle has yet to be known, most analysts believe the optimists have a slight edge.

As Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, sees it, there is room for a 5% to 10% drop in the market and these big pullbacks typically occur about three times a year.

Yet, for every reason for stocks to retreat, there are also as many factors to spur them higher.

Synchronized global growth, continued stimulus around the world, and upbeat U.S. economic data all support the positive scenario. On the other hand, concerns about valuation and the aging bull market, central banks’ moves to normalize interest rates, and elevated leverage tip the scale in favor of pessimists, according to the strategist.

Bank of America Merrill Lynch

Jack Ablin, chief investment officer at BMO Private Bank, stripped down the contest for market control to the bare bones.

“It’s a battle of bearish political headlines versus bullish liquidity where liquidity has the upper hand. Like an IV drip, the world’s central banks, the Fed included, continue to buy financial assets with printed money,” said Ablin. “Over the last 12 month that figure approached $2 trillion. We’ll get bearish when liquidity dries up.”

After weeks of trading in a tight range, the market had a scare this week when stocks plummeted on news that President Donald Trump asked then-Federal Bureau of Investigation Director James Comey to stop an investigation into Russian meddling into the U.S. election.

See: White House official probed over Russia and president called Comey ‘nutjob’

But Tom McClellan, technical analyst and editor of the McClellan Market Report, believes Wednesday’s plunge was a one-off event and noted that a sharp decline on a day when the SP 500 closed above its 200-moving day average usually do not lead to further downside. The large-cap index finished at 2,357.03, above the 200-moving day average of 2,255.01 on May 17.

In the chart below, he illustrated the market’s resilience over the past months and its tendency to rebound after one-day selloffs, reiterating his view that stocks will peak next week.

Tom McClellan

Read: Technician sees stock market top in late May

Meanwhile, political drama is likely to become a familiar feature in the financial markets as Trump continues to attract controversy.

“Individual investor sentiment is really slipping right now, and political friction seems likely to continue for a very long time—not an ideal situation,” said Richard Hastings, a macro strategist at Seaport Global Securities LLC.

As market observers have noted, this week’s turmoil was less about Trump than what an embattled president will mean for the pro-business policies that he had pledged to enact.

“Each day we spend on investigations is one less day we are spending on the policy reform that is built into the expectations for this market,” said Ian Winer, head of equities, Wedbush Securities.

See: Goldman slashes tax-cut expectation as Trump drama rages

All major indexes rose on Friday but the SP 500

SPX, +0.68%

 and the Dow Jones Industrial Average

DJIA, +0.69%

 fell 0.4% for the week while the Nasdaq Composite Index

COMP, +0.47%

 logged a weekly drop of 0.6%.

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