Mirror, mirror, on the wall, which way will the market fall? Will it rise, will it fall, ……?

At 1,100 on the S&P, 5050 on the Dax and 5000 on the FTSE, I thought yes, this could be the place for a short term bounce.  I am feeling that way at 1220 and close to 6,000 on the DAX, but the other way. 

There is a lot of liquidity on the sidelines, and yes, this liquidity has learned that the market has been moving up and down on news, with a reasonable degree of certainty.   There is money to be made, perhaps the only money to be made in the house, on a regular basis. 

I thought, tongue in cheek, it would be fun, to see if we could pin point relative value points on the major markets based on what appears to be the current modus operandi of the markets. 

I am no market technician, and do not play the short term, but the market appears to be working on a set of ranges:

a) buy or sell on 5% up down moves,

b) up and down moves can be greater depending on whether news confirms deterioration, stabilisation or improvement.  Say 10% from the upper and lower points of the range for deterioration and improvement.

c) bears and bulls are ultimately looking for breakouts below 1050 and 1300 respectively. 

Stabilisation, but no change in the fundamentals, appears to move markets back to where they were in August, say 6000 on the DAX and 1200 to 1220 on the S&P 500.   

Improvement in data would move markets upward, possibly back up to where they were at the end of July: now, most sides probably believe we are not going to get a massive improvement, but over the short term economic data could be volatile either way, and so could the market. 

So, if you are an optimist trader and believe we are not going to enter recession, you may be looking to play a downside move right now, but would be ready to change positions to the upside if good news came your way.  Your upside bets are always bigger.

If you are a bear trader, you could be looking to sell the market now, and possibly take bigger bets to the downside if news deteriorated.   If better news came, you may take your bets off the table, but may not move them to the upside, in the short term.  Your downside bets are always bigger.

So, for sake of simplicity, focussing on the US market, what could we expect based on these assumptions? 

Let us say 1,050 to 1220 on the S&P 500 on stable data, and 1,080 to 1,150 on deteriorating data, and 1220 to 1300 on improving date, with a recession or growth at 2.5% + per quarter moving the market on the plus side above 1300.  

Confirmation of growth and or recession, would move the market 20% + either way: 950 to 1500. A depression would see the S&P move below 950 and a continuing recovery, obviously a sustained move finally above 1500.

My calculated guess is that the risks are on the downside, because of the weight of debt, structural imbalances (global and across identities) and unemployment.  Say 20% probability of depression/deep recession, 60% probability of either recession or depression,  30% chance of continuing low growth environment with risks to the downside, and say a 10% chance of final recovery.

So let us see, how all this going to play out!

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