Technically Speaking: The Goldilocks Warning

As we enter the final month of the year, stocks (as measured by the S&P 500) have made little progress for the year. Unfortunately, many hedge and mutual funds are lagging well behind on a year-to-date basis. As I stated recently:

“Historical tendencies suggest a bias to the upside. This is particularly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks. The need to play ‘catch-up’ will likely create a push into larger capitalization stocks as portfolios are ‘window dressed’ for year end reporting.

Importantly, the traditional ‘Santa Claus’ rally does not guarantee the resumption of the ongoing ‘bull market’ into 2016. In early November, I laid out the expectation of a market decline back to support which would facilitate the year-end advance. Here is the updated version of that chart:

So far, the expectation the strong October advance would experience a pull-back to support setting up the year-end push towards overhead resistance continues to play out. 

It is quite likely that over the next couple of weeks the markets will experience a higher degree of volatility as mutual funds begin their annual distributions of short and long-term capital gains, dividends, and interest. Following those distributions, the last half of the year should be more positively biased as managers position for the end of the year reporting. 

The forecast for the end of the year, however, does not carry over into 2016. With declining profitability, a weak economic outlook, surging inventories, a stronger dollar and a potential for higher rates there are may headwinds that currently exist. However, my biggest worry comes from the rising utterances of “it’s a Goldilocks economy.” 

The Goldilocks Warning

Just this year there has been a rising number of articles suggesting that we have once again entered into a “Goldilocks Economy.”