Forecasting is one of the most maligned practices in the world.  And, more often than not, it’s maligned for good reason.

When I worked at DuPont, the one job everyone avoided was coming up with business forecasts for the next year.  These were either hopelessly low (to make them easier to achieve) or ridiculously high (for businesses that were looking for additional product development funding or a bigger marketing budget).  A sane middle-of-the-road case was rarely made.

We can find the difficulty of forecasting and our cultural disdain for that tough job in our feelings about weather forecasters.  They have been the butt of jokes since the profession began.  Here is a quip I read 30+ years ago in Readers’ Digest:

Letter to the local TV station weather forecast: “Hello.  I’m just writing to inform you that I have six inches of ‘partly cloudy’ on my front lawn.”

Stock market forecasters don’t usually fare much better.  The old advice to help forecasters remain “safe” was, “Never give date and price together” or better still, “Forecast often.”

Two Big Gorillas

Today, anyone looking to forecast market movement has not one, but two big factors to hamper their analysis.

The first 600 pound gorilla in the forecasting room is all that stinkin’ stimulus money.  How do you try to take into account the fact that five TRILLION dollars has been pumped into the economy in some way, shape or form?  This is an unprecedented amount of liquidity creation, and most fundamental models don’t have ways to process that level of outside intervention.  Is it any surprise that a large portion of that money made it in to the stock market?  Interestingly, for the size of the cash infusion, very little actually went toward producing products and services; it was mostly a paper infusion.

The second 600 pound gorilla is the artificially low interest rate.  With essentially zero return on cash, Bill Gross (Pimco’s bond maven) writes, “…the continuation of punitive 0% short-term rates force investors to buy something, anything, with their cash…” (emphasis is his).  And as it turns out, that “anything” has been mostly stocks with some gold and oil thrown in the mix.

Forecasting, Bulls, and Bears

So pity the poor stock market forecaster today; there are so many more competing factors and external influences that he/she has to take into account compared to the past.  What might happen?  The five billion dollar party that the stock market is throwing could end with the bears inducing a sharp pullback any day now.  Or the bulls, drunk with cash, could keep this thing moving higher for months.  A very likely scenario is that we have a blow off extension like we did in the last months of 1999.  That would have the partying like it’s 1999 for sure, but…

Listen to What the Technicals Are Saying

As we look at the recent market action, there are a few key technical items to keep in mind.

This is a multiyear price chart for the SPY—the ETF equivalent of the S&P 500.  A clean break above the 50% Fibonacci peak-to-trough retracement would be a clear sign for a bullish continuation.  Alternatively, several closes below the 50 day moving average could warn of a more serious short term drop.  I believe the probabilities point to the 50 day MA holding and continued bullish price action into year end.  But in general, all that stimulus cash flying around makes the image in my crystal ball a bit more fuzzy than usual…

Great Trading! D. R.