Market Correcting Over Time By Trading Sideways Versus Steep Price Drop

Since February the S&P 500 Index has essentially traded sideways within a 4.8% trading range. This sideways market movement may be resulting in a trading pattern where the market is correcting over time versus correcting with a steep price drop. A sideways market correction enables earnings to catch up to the market's price. As the below chart shows, several of the technical indicators suggest the future market direction is one where the price could trade to the bottom of this trading range highlighted by the yellow box on the chart.

From The Blog of HORAN Capital Advisors

A closer view of the market, as provided by Charles Kirk of the The Kirk Report, shows there are three additional gaps the market may attempt to fill that will take the index level to the lower end of this trading range. His commentary included with his technical analysis notes,

"As shown in the chart [below], the S&P filled the first lower gap, tested and bounced from the 38.2 fibo, and then closed right at first support at the 50 day at S&P 2102. This is seen by many as an important support level that if not defended will soon bring the three other lower gaps into play as trade to targets."

From The Blog of HORAN Capital Advisors

Source: The Kirk Report

One question is what factors will cause the market to trade to the upside and out of this trading range? One fundamental factor is that of company earnings growth. Recent earnings reports have generally beat analyst expectations, yet S&P 500 earnings growth for Q2 is expected to decline about 2%. Top line revenue results have been weaker than expectations in Q2, with companies citing headwinds from the stronger US Dollar. A positive is the energy and currency headwinds will begin to subside in Q3 and especially in Q4 and Q1 of 2016 as these headwinds are lapped in the year over year comparisons. In Q4 2015 and Q1 2016 earnings growth is expected to be about 4% and 9%, respectively. This better earnings growth could be a catalyst for higher equity prices beginning later in Q3 and into 2016.