A week ago, the stock market was on the threshold of a big tumble, but some prescient investors sensed a change for the better and ran the table adding 780 points (7.3%) to the stodgy Dow Jones Industrial Average in 5 days.
In face of bad news, the stock market probes lower levels seeking a comfort level that discounts known and foreseeable adversities. That’s what it has been doing since August 9 when it entered an erratic trading range that has featured five, abrupt swings up and down, three exceeding 9%.
It appears two obstacles to a sustained uptrend in prices are lifting, fear that the U.S. is heading into a recession and angst over the euro-zone banking and sovereign debt crisis, which few people including myself fully understand .
If this “is it,” where is the volume !
By generally accepted yardsticks, stocks are cheap, at least based on historic price/earnings ratios.
If this is a leg of a rally that is destined to break through the September intraday high of DJIA 11,740 (S&P 500:1231) and launch an assault on the 2009 -2011 bull market highs (DJIA: 12,928 – S&P 500: 1370) , I would expect the volume of our leading stocks yesterday to at least reach their average daily volume over the last three months.
While the Dow jumped 330 points, volume was light, even taking into consideration Monday was a bank holiday. But volume has been dropping throughout this five-day advance.
Of the 39 stocks accounting for close to one-quarter of the Nasdaq Composite Index, only two exceeded their average volume (Celgene:CELG, CME Gp.:CME). One of the Dow 30 managed to match average volume, Alcoa (AA), which kicks off Q3 earnings reports after the close today.
At best, yesterday’s low volume tells me there were not a lot of sell orders on the books, enabling the market to fly with ease.
Recent reports on our economy suggest it is not un a hurry to tank, that sluggishness rather than recession will persist for the intermediate-term, at best.
Over the weekend, Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy announced that they will introduce plans to address Europe’s debt/banking woes on November 3. To me, that suggests a lot of loose ends must be tied up in the next three weeks allowing “uncertainty” to creep in in the interim.
What does all this mean ?
Positives: We are approaching the “Best Six Months of the year to own stocks”*(Nov.1 to May1). With interest rates at historic lows and stocks historically cheap, institutions have nowhere else to invest client’s cash. It is a fact that economic recoveries (and jobs) are a product of the preceding recession. That said, our sluggish recovery in the economy and job market following the 2007 – 2009 Great recession is normal and stands to improve within a year – to 18 months.
Negatives: While recent economic reports have not been deteriorating, they are marginal, at best. The European situation is still dicey.
The stock market has rebounded into an area that has attracted a lot of selling over the last two months. The buying volume must pick up from here to sustain the up move. That spells risk for new buying.
Q3 earnings reports may add some juice to this rally. More important, however, will be whether analysts will revise future earnings downward in light of the economy’s sluggishness in recent months.
This week won’t offer much in terms of economic reports until Thursday’s Jobless Claims and Friday’s Retail Sales and Consumer Sentiment.
The SuperCommittee has been lost in the shuffle, upstaged by international financial worries and the state of our economy here at home. Nevertheless, it will raise its ugly head to remind us whether our government is, or is not, dysfunctional.
12-member SuperCommittee timeline:*
Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.
Oct.: 14: Deadline for House and Senate Standing Committees to submit recommendations.
Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction goal of $1.5 trillion Dec. 2: Deadline for committee to submit report and legislative language to President Obama and
Dec. 23: Deadline for both houses to vote on committee bill.
Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if
the committee’s legislation has not been enacted.
Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.
Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche
($1.2 – $1.5 trillion) of debt limit increase.
Fall/Winter 2012: When additional $2.1 – $2.4 trillion of borrowing authority from this law runs out.
Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary
to meet spending cuts required by the “trigger.”
Recent blog headlines:
Sept. 16, DJIA: 11,433 “Easy Does It ! Test of August Lows Possible”
Sept. 19, DJIA: 11,509 “Consolidation Pattern to be Resolved Soon”
Sept. 20, DJIA: 11,401 “Beware – Breakout Fake out in the Offing”
Sept. 20, DJIA: 11,401 “Breakout – a Fake out in the Offing ?”
Sept. 21, DJIA: 11,408 “Muddied Waters – News Prompted Breakout a Potential Fakeout”
Sept. 22, DJIA: 11,124 “Opportunity to Follow Wrenching Probe for a Bottom – Dow 9,680 ?”
Sept. 23, DJIA: 10,733 “Don’t Buy a Bounce Fueled By Reassuring Statements”
Sept. 26, DJIA: 10,771 “Stock Market Bottom Here – Premature”
Sept. 27, DJIA: 11,043 “Market Bottom Needs More Time”
Sept. 28, DJIA: 11,180 “Getting Close to a Breakout (UP or Down) From Two-Month Trading Range”
Sept. 29, DJIA: 11,010, “Approaching Consolidation Crossroads – Up ? or Down ?”
Sept. 30, DJIA: 11,153, “Bulls Need a Big Day, or Else”
Oct. 3, DJIA: 10,913, “Almost Ugly Enough for a Buying Juncture”
Oct. 4, DJIA: 10,654, “ Marching to Europe’s Drumbeat – October Opportunity Looming”
Oct. 5, DJIA: 10,808, “ News Whipsaw Becoming Problem for Bottom Watchers”
Oct. 6, DJIA 10,939 , “ Traders’ Sell – Investors – Defer Purchase”
*Stock Trader’s Almanac
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.