Why 2014 might be a great year for traders

Colin Cieszynski is senior market analyst with CMC Markets in Toronto and is a Chartered Financial Analyst and Chartered Market Technician. Colin's columns appear daily at Globe Investor Gold and we welcome him aboard now as a frequent contributor to Globe Unlimited's Inside the Market.

The market action over the last couple of days has me thinking that we could be in for a great market for trading over the next six months to a year.

While traders can find opportunities taking sides in trending markets, it's during the times that markets become range bound and stage significant swings in both directions that trading approaches can really outshine long-term investors who get nowhere except whipped around.

It's common coming out of cycle bottoms for markets to rally, fuelled by improving expectations and monetary stimulus from central banks following the path of least resistance into stocks and commodities. (It's much easier to put hot new money into the market then to lend it to individuals or businesses on Main Street). Eventually, though, this stimulus needs to be removed or central banks run the risk of creating asset bubbles.

The removal of stimulus takes the rocket fuel away and has tended to knock stocks back from overinflated levels as people find it harder to get cheap loans and have to repay. Recall that following the end of both the QE1 and QE2 programs, major U.S. indices fell by over 10 per cent within three months.

Stocks contracting because the easy money punch bowl has been taken away can only fall so far, however, before running into support from an improving economy as rising corporate earnings reduce overvaluation.

Which of these forces has the upper hand can vary from day to day but over a period of weeks or months they offset each other and create trading swings within sideways trading ranges. The last two decades saw this type of mid-cycle consolidation take place in 1994-1995 and 2004-2005, each time running over a period of 8-12 months.

Over the last 36 hours, we saw stocks get knocked down hard late Wednesday on indications that the Fed is likely to continue tapering through this year and could start raising rates in mid-2015 with several members expecting rates to rise to a whopping 1.00 per cent by the end of 2015.

However, stocks have rebounded on stronger-than-expected Philadelphia Fed and leading index data, indicating that the U.S. economy is accelerating out of a difficult winter, creating a positive environment for corporate earnings and potentially resource demand.

The way these forces have driven big moves in both directions suggest that we could be moving into a range bound market that could create a number of opportunities in both directions for active swing traders to take advantage of in the coming months.

This chart highlights the mid-cycle consolidations in 1994 and 2004 plus the end of the two previous QE programs in 2010 and 2011.

There are a number of other factors that could also spark market moves in the coming months. Seasonality may remain a significant influence on trading. While the period from now through May has historically been strong for markets, the period between mid-May and Mid-October has historically been the weakest time of the year for stocks (although sometimes we get a relief rally in July around the start of earnings season).

In addition, developments in other countries can move markets. Today, we have seen more duelling sanctions as Russia has formally annexed Crimea in response to last weekend's vote.