View the Stock Market as a Series of Trading Ranges

For many years, Abby Joseph Cohen, Senior Investment Strategist at Goldman Sachs, has been a welcome voice of reason and counterpoint to the shrill hucksterism that permeates much of Wall Street commentary these days. In a recent Business Week interview with CNBC’s Maria Bartiromo, Ms. Cohen said:

“…the market should be viewed as a series of trading ranges [a trading range is the spread between high and low prices over a period of time]. Forget the U, forget the V; it looks like a staircase. We’ve had a very significant upward step from March. And we think that the next step will also be upward. There are two very important things here. Number one, we think the recession will be ending. We think that GDP will be positive in the second half of the year. The other thing that will look better will be corporate profits. Keep in mind that we’re getting to some extremely easy comparisons. The third quarter of 2008 was dreadful. So those comparisons are going to look great. Also a bit of an optical illusion is that some of the companies in big trouble that were in the S&P index a year ago, may no longer be there. But the third thing that is more important…is that we do see profit margins picking up.”

As Ms. Cohen noted, because stocks have come so far, so fast since bottoming out in early March, a pause or even modest pullback is not cause for concern. The greater danger is stock valuations getting too far ahead of themselves, setting the stage for a more substantial correction. Think, two steps forward—one step back; two steps forward…