Stiff headwinds ahead for the market

It is truly wonderful that the recent rally has held up as well as it has, but the future of this rally is still a big open question. Sure, we could have a "nice" little "Santa Claus rally" through the end of the year (and maybe even some traditional "window dressing"), but then what? Europe remains a drag, but is still more of a sideshow than a primary determinant of the market trend. There will probably be some trader and short-term speculator interest in how retail sales are progressing during this holiday shopping season, but that's a short-term issue and not an indicator of how 2012 will unfold. The outlook for 2012 is indeed murky and will to some extent be a drag on the market, but as long as the outlook does not worsen appreciably, we can depend on the fact that "a bull market climbs a wall of worry." But if the outlook worsens, that is another matter.

 

Maybe the real bottom line is that as nice as the rally has been, it still has only really been simply a recovery of the losses since the October 28th Dow peak of 12,231. For the rally to really "have legs", it will need to handily hop over that peak (only 50 points away) and then put another couple hundred points and couple of weeks behind it. That is all doable, but any rally built on short-term sentiment rather than the longer-term economic outlook has a very short shelf-life, and is very susceptible to traders and short-term speculators losing patience and flipping over to try o ride the market back down in its trading range.

 

Even if the Dow manages to reclaim the 12,250 psychological level, sustaining the rally much beyond that will depend on some brightening of the longer-term outlook. Surmounting the 12,500 and 12,750 levels will be daunting indeed, but still within the realm of reason.

 

There is still the very real possibility of a significant economic slowdown if not an outright recession in 2012, so it will be interesting to see market participants struggle as they try to resolve all of the various competing narratives about the economic outlook. I personally acknowledge that the potential for a recession (or at least a near-recession) is quite real, but I still feel that a recession does not seem to be imminent.

 

And even if the outlook does hold up or even improve, traders and short-term speculators will insist on periodically "testing" the market, engaging in a little "profit-tanking", and occasionally even some breathtaking mini-corrections, so be prepared for lots of volatility.

-- Jack Krupansky