Despite the wide swings, stocks may now have seen their lows for the year, some strategists say.
However, if the market has set the year's lows, that still doesn't mean smooth sailing for investors. It also does not mean the market will break above its current range, which tops out at about 1250, until more of the uncertainty surrounding Europe and the economy are resolved.
"We do think we've seen the low for the year but can't be as confident it's the low for the next 12 months," Brown Brothers Harriman strategist Andrew Burkly said in a quick note. "The can looks to be kicked at least past year end and earnings should be good."
Harris Private Bank chief investment officer Jack Ablin said he too thinks the market hit bottom last Tuesday, when the S&P 500 plunged to 1074 on an intraday basis. Ablin pared back on his stock holdings in early August and has been looking for a reentry point.
The S&P 500 finished Monday at 1194, a 3.4 percent gain over Friday's close.
"We picked 1050 as our entry point. We never got to that point, but we also said if we got some favorable momentum or the dust settled in Europe, we could use it as an entry point...I don't know if today's action signifies a solving of Europe, but it's certainly a step in the right direction. So, I think earnings could also propel the market higher," said Ablin. Ablin said he meets with his investment committee Tuesday morning to consider whether to change his position on stocks.
The way I look at it right now, we are stuck in a broad trading range of 1250 to 1050 on the S&P 500. I don't think we can break above 1250 without Europe coming up with a long term solution to the sovereign crisis there, and I think that can only happen with fiscal consolidation, which will likely take years to fully implement (assuming they can all agree to actually do this). However, I don't think we can break below 1050 unless Europe actually blows (e.g., Greece default and/or European bank failures / financial crisis)...
As the market gets close to the bottom of the range, as it did about a week ago, it becomes very oversold and very difficult to break through unless European blow up actually occurs. So once we breach 1100 on the S&P, unless we continue to get horrific news on a near daily basis to keep pushing it down, shorts get nervous and start to cover. Why? Because at 1100, stock are actually really cheap if Europe ends up being ok. On the flip side, once the S&P gets above 1200, the risk reward of staying long gets weaker and weaker and it is much easer for a headline to cause a sell off that snowballs. As the market climbs closer and closer to 1250, the shorts pile in because they are pretty comfortable that there isn't a lot of upside if they are wrong, at least as long as the European overhang remains.
So the bottom line is, until Europe finds the ultimate fix, or until it blows, we are likely stuck in this range. And it could last for years as Europe continues to kick the can down the road in 3-6 month increments without solving anything. So when S&P gets close to 1100, start buying / scaling in. When it gets above 1200, start selling, scaling out. I've been doing this for the past 2+ months and it has worked well and I don't see the pattern changing anytime soon.
Don't get all emotional with fundamentals and the market is crooked / frauds, etc. If you stop and think about it there is some logic to it all. The craziest thing is how quickly we are bouncing between the ends of the range, in days what would normally take months or even years. That's volatility for you.