Range bound?

After weeks of fear and heavily bid volatility we are starting to see a bit of slow down in the markets. Volume is light, and vol is starting to get offered from skyscraper levels. Claims from European leaders that we will soon see some great rescue plan has brought some calm to the markets. While we have been rallying, the general consensus seems to be that we are in a range bound state. That range, as far as the S&P is concerned is between 1120 and 1220. This afternoon the S&P made its highs right around 1220 and then sold off to close @ 1207.25. This seems perfectly healthy and sensible. Heavy ETF selling came in toward the end of the day as it appears hedge funds were taking profits, and why not? We hit our target on the S&P and the bulls wounded from the bludgeoning of the last few weeks should be happy to take a profit. For now, sentiment seems to indicate that this relief rally is over and the technical picture points downward, but for the next week, I don't see a whole lot of upside in getting short.

If the longs were profit taking this afternoon, and volume has been light, we are left to ask who the sellers will be in the coming days. While perhaps there will be some continued profit taking from the longs, it is hard to foresee significant short positioning in the short term. Merkel and Sarkozy have pointed to October 23rd as their date for revealing their big plan to save Europe. Until then, bad Euro news is unlikely to spook markets as potential shorts will fear that today's shorting opportunity could go in their face if the Euro plan accounts for a fix for that bad news. Stocks within indices have been extremely correlated, as have asset classes. All one needs to do is look at the relative spike in ETF volume to see that its the macro picture as it pertains to Europe that has driven this market. If the longs were indeed taking profits this afternoon, one would be hard pressed to argue that they will now reverse positions and get short. You never short a quiet market, and for the next week, there is little reason to think that the quiet will dissipate. A few positive earnings surprises and we could see a reversal of sentiment.The likelihood is that we do remain range bound for the short-term, but good earnings might re-awaken investors to the fact that inevitably it is earnings that drive stock prices. As such, despite the technical picture, I see greater upside to being long in a positive earnings environment than I do to being short in front of worse than expected earnings.