The Next Phase is Coming Soon

I am going to argue that this year's stock market can be divided up into three or four distinctly different phases so far and that the current "sloppy period" could very well wind up being a prelude to the final phase of the year. Before you start booing, throwing things at your screen and calling me a hypocrite based on my oft cited "no predictions" rule, let me state that this morning I'll be spending much of our time looking back at what has transpired as opposed to looking into my very cloudy crystal ball.

If you will recall, the beginning of the year was highlighted by a steady, low-volatility, logic- and herd-defying rally phase that began at the end of 2011 and lasted until April Fool's day. This move was driven by some relief from the never-ending European debt mess as well as a long string of U.S. economic data that was largely better than expected (oh, and the relentless march higher in AAPL shares didn't hurt either). This flew in the face of the oh-so popular "the sky is falling" theme that was prevalent at the time, which also caught the vast majority of the macro-themed, deep thinking traders and hedge fund managers leaning the wrong way.

Unfortunately, the feel-good rally went a bit too far too fast and as such, fell victim to yet another "sell in May and go away" phase. As usual, the ensuing move lower was sponsored by our good friends across the pond. This year's summer slump was also helped along by data suggesting that the U.S. had encountered another soft patch and the "R Word" was all the rage again by the time summer vacation season got underway. And while the 2012 bear raid was only good for a drop of -10% on the S&P 500, it sure felt like the bad-old days of 2011 had returned.

The market then spent the better part of June and July moving up and down in a volatile fashion, but largely recovering from this year's midsummer nightmare. I guess technically we should call this a separate phase, but since I like to keep things simple, I'm going to lump the recovery into what I'll call the "Bazooka phase."

Since the end of July, stocks have basically been reacting to the firing of what is affectionately referred to as "the bazooka." In case you are not familiar with the term, the bazooka represents a globally coordinated response by governments and central bankers. When you consider that the central banks of the UK, U.S., Japan and the ECB are all printing money, it is pretty hard to argue that the bazooka isn't being used at the present time. And since rule number one in the stock market is "Don't fight the Fed" (especially when they are on a mission), it isn't terribly surprising to see stocks sitting very close to new highs for the current bull market cycle.

To summarize, we saw a strong rally phase early in the year, a decent correction phase during the "sell in May and go away" period, a late-summer recovery, and now a rally phase based on the idea that the global central banks of the world are on the case. So, in looking ahead, I believe that since that the market has done exactly nothing for the past three-plus weeks; it would appear that stocks are currently waiting to embark on the next phase.

In light of the fact that survey after survey suggests that it is political and fiscal uncertainty that has been a primary deterrent to job creation, we probably need to recognize that the election might finally become a driving force in the markets over the next few weeks. And regardless of which team you prefer, I think we can all agree that this election is certainly going to be interesting. But up until this point, I can't say that the market has paid the race for the White House much attention.

The key here is I believe the election will be a positive regardless of who wins. I say this because this election has clearly raised the debate in this country about the direction the country is heading, the budget process, taxes, and the role/size of government. Thus, I'm of the mind that whoever wins the White House this time around will wind up receiving a mandate from the public (oops, I mean the electoral college - insert eye roll here). And because of this, the children in Washington might finally be forced to play nicely together in order to avoid launching the economy off of that fast-approaching fiscal cliff. Therefore, while the election hasn't had much impact so far, it could easily become an important catalyst very soon.

In addition, earnings season could also play a big role in the coming month. So far at least, it looks like the bar for this quarter's results has been sufficiently lowered. And since traders have had ample time over the past couple of months to adjust their thinking to reduced earnings and revenue expectations, my thinking is that unless Corporate America is really struggling, earnings may not be the recipe for disaster the bears have been hoping for.

There are four or five other potential catalysts out there that I could yammer on about this morning. However, the key point I'd like to leave you with is the market appears to be "setting up" for the next phase. And no, I am not going to try and predict what that phase will bring. However, I can say that the traditional year-end rally period will be coming fast once we get through the mid-October period.

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Turning to this morning... Overseas markets are mixed despite the IMF's latest report which downgraded global growth. But with European leaders meeting today, we will need to stay alert for any and all comments regarding growth prospects, Greece's next bailout tranche, and of course, Spain. Finally, Alcoa's earnings kick off the earnings parade after the bell today.

Thought for the day... "You miss 100% of the shots you don't take" -- Wayne Gretsky

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

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