Stocks rebounded in spectacular fashion last week, the angst of the last few weeks apparently forgotten as quickly as a central banker can float a trial balloon. First there was the Bullard bounce that moved us off the lows when things were looking their grimmest and then last week we got a rumor about the ECB potentially buying corporate bonds in an effort to goose the European economy. The fact that the rumor was denied almost immediately seemed to make no difference to investors who have been conditioned to push the buy button at any hint of easy money. Pavlov would be proud of his disciples at the Fed and ECB.

The problems that pushed stocks down have not gone away, although a spate of decent earnings reports did ease worries for the time being. Europe is still trying desperately to find a way to keep growth in the positive column and China’s economy is still slowing. The Middle East is still on a low boil of conflict (although that has been true for most of my career) and Russia continues to stir the pot of Crimean/Ukrainian stew. US Treasury yields rebounded from whatever it was that pushed them under 2% just a couple of weeks ago but at current levels aren’t exactly predicting a boom. The dollar resumed its rise last week and commodities are still falling, keeping global deflation fears on the front burner. We were also reminded last week that terrorists are not just angry at the US and that the Ebola fears are not over yet. But none of that mattered last week as buyers moved in ahead of the Fed meeting this week.

I do wonder if there was a bit of anticipation (hope?) last week that the Fed might indeed follow Mr. Bullard’s prescription of extending the taper of QE a bit longer. The Fed is trying to find a way to end QE and get off the zero bound for rates without upsetting the market or the economy, something I think will be next to impossible. The seizure in the bond market last week, if even for a day, probably produced a lot of stomach acid down at the Fed and it must be tempting to just leave QE in place, even at a nominal amount, so they don’t have to announce QE4 somewhere down the road. Having said that, I suspect anyone buying last week in anticipation of a surprise at this meeting will be disappointed. And with the market at a technical crossroad, don’t be surprised to see the selling return this week.

I’ve been thinking about the potential market outcomes now that the relentless rally seems to have ended. US stocks are barely positive and at the lows last week were almost 10 months into a sideways move. Neither bulls nor bears have been sated this year as the rallies have proven fleeting and the selloffs even more so. So which way from here? A resumption of the bull move from already high valuations seems unlikely. The onset of a bear market, absent a recession, seems equally unlikely. It may be that the most likely outcome is the one we’re already experiencing; sideways is not just a boring, self indulgent movie.

Investors seem to think that markets are binary, either rising or falling, bull or bear, but the market actually spends a lot of time doing neither. An old Wall Street adage says that tops are a process while bottoms are an event. When we think back about previous markets we often forget how long things take to happen. Looking back on a long term chart tends to compress the time frame and we remember things happening a lot faster than they actually did. Turning points in markets, despite the old saying, take time to happen. Bottoms are remembered to the month. August 1982, November 1994, November 2002 and March 2009. But those bottoms took a long time to form; it is just the final washout that is memorable.

Tops are not often remembered that way and certainly not recognized in real time the way bottoms often are. The late 90s bull market topped in March 2000 but that was only obvious in hindsight. The S&P 500 actually spent almost 18 months trading in a 10% range from mid 1999 to late 2000. The top of the last bull market in November 2007 was certainly not recognized at the time as a top. We had a warning about the market in the summer of 2007 but by November that correction was long forgotten. That top saw the market trade in the same narrow 10% range as its predecessor from the beginning of 2007 until early 2008, over a year. Turning points take time and if we’re in one right now, it could be quite a while before it is recognized as such.

I’m not saying we’re in the process of putting a top on this bull market but then again it wouldn’t surprise me in the least. There seems little reason to expect the bull market to continue when valuations are rich and the Fed is, ever so slowly, removing their accommodation. There also seems, at least for now, little reason to worry about a recession and the bear market that usually accompanies such periods of contraction. The economic data, while not exactly robust, is not signaling anything worrisome at present. Last week continued the pattern of weak and strong data I’ve been reporting for well over a year. Existing home sales were down year over year. Mortgage applications rose but purchase applications fell. New home sales were up but only after a huge downward revision to the previous month. And it shouldn’t be lost on anyone that the new home market is still struggling at levels that are only at the very low end of the historical range. Jobless claims rose but are still below 300k showing no signs of stress.The Chicago Fed National Activity Index showed some strength and manufacturing surveys were still positive. The incoming data remains mixed and the economy appears to be growing at the same – disappointing – 2% rate it has for the last few years.

So, with little reason to rise and little reason to fall – at least from an economic standpoint – it may be that the battle between the bulls and bears will remain a standoff until there is solid evidence to support one or the other. That is an outcome that few are predicting, as it doesn’t exactly write a compelling headline, but it is one that seems logical given the available information. It may be that the economy is peaking for this cycle and we are in the process of putting a top on a bull market that has defied prediction from its start. Or it may be that we are merely in for a consolidation as the Fed normalizes policy, the economy fully heals and the bull market resumes. I have to say though, that second scenario would seem to have some long odds absent major changes in economic policy. And, yes, the election may change the conversation but it seems unlikely to change policy any time soon.

With the global problems still persisting and uncertainty surrounding the course of Fed policy, I suspect this period of heightened volatility is not over. The rally last week accomplished nothing technically and we are still way overdue for a real correction of 10-20% so if we are headed for a continuation of the sideways market we’ve been in all year, the bottom of the range has probably not been established just yet. It is often said that markets will act in a way that frustrates the maximum number of people and with the bull contingent shrinking a bit lately and the bear den still well staffed, the two camps are looking pretty evenly matched right now. A draw, a market that satisfies no one, may be the most likely outcome.

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