The Week Ahead: Two Potential Stock Market Scenarios

Stocks continued to grind higher last week, but the ranges have continued to narrow as the rally from the October lows has progressed. The close on Friday will determine whether we have a higher weekly close or not as after Thursday’s close, the Spyder Trust (SPY) is up just 0.40% for the week.

In last week’s column Three Reasons Not to Jump into Stocks Now, I shared the reasons why I thought the market should not be chased at current levels.  So far, neither the technical action nor sentiment picture has changed enough to turn me more bullish than I was last week.

The seasonal trend analysis indicates that, historically, the last two weeks of November are a tough time for stocks. Looking at the last five years—in the context of the recent stock market action—suggests two likely scenarios for the last six weeks of the year.

The price action of the past two years does not fit well with the current market. In 2013, the stock market rallied from the October 9 lows until the end of November. After a two week consolidation, the market moved higher into yearend.

In 2012, stocks peaked at the beginning of October and then bottomed on November 16.  Stocks moved generally higher until yearend, though they did have a pullback in the last six days of the year.

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The price action this year could end up following the path of 2009, which is one possible scenario. Then the SP 500 made its monthly high on November 16 (line 1) but then moved in a range until the end of the month. The SP did make a marginal new high in early December before, again, dropping back to the lower boundaries of its range, line b. This period of consolidation (lines a and b) set the stage for a move to new highs at the end of the year.

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