"Man has demonstrated that he is master of everything except his own nature."—Henry Miller
Summertime, and the market is sleepy.
While the period from July through Labor Day is traditionally a time of exceptionally low trading volume on Wall Street, the last couple of weeks have been extreme, even compared to the usual dog days of summer. Volume on the Dow Jones Industrial Average (DJIA) hovered around the 85 billion level, which is just about half the trading volume compared to 2011 during the same period.
In spite of the low volume, or perhaps even because of it, the major indexes managed to perform relatively well. The Dow ended up 0.9%, the fifth week in a row it has finished in the black, its best winning streak in over nine months. Similarly, the benchmark S&P 500 Index (SPX) nudged into the black, though just barely, ending up 0.2% on the week. The SPX is on its own six-week streak of gains, ending Friday just above the psychologically important 1400 level.
The last time SPX hit the 1400 price level was in May. It served as a point of resistance and marked the beginning of a one-month correction, dropping about 8% in a little over a month. That sharp drop was related to an uptick in investor concern over the Eurozone. Since that time, the market has been choppy, but still has trended up over the last two months, with the SPX making back the 8% it shed back in May.
Also worth noting is the current level of the VIX, which is sitting at a five-month low. The VIX, often referenced as the "fear gauge," is seen as a good indicator of investor sentiment.
But what is actually going on here? Have investor concerns over the problems of the Eurozone, Chin, and the U.S. economy been baked into stock prices somehow? Will the Bulls take advantage of a perceived lack of fear on Wall Street and keep the market on its current upwards trajectory?
That seems like a stretch.
Nothing has been resolved over in Europe, in spite of the European Central Bank's president promising to take any necessary action to address its sovereign debt problems. In fact, the rift between Germany and the PIIGS (Portugal, Ireland, Italy, Greece and Spain) seems more pronounced than ever, as nationalistic interests can be viewed as presently trumping the collective economic health of wider Eurozone needs.
China, meanwhile, is reporting data that seems to reflect the possibility of a harder landing than many economists expected. Last week's economic report indicated that the world's second largest economy had suffered a surprising narrowing of its trade surplus, with exports close to stagnant compared to the previous month. Coupled with weak industrial output and poor retail sales numbers, China can be seen as an economy that is fast cooling down after a decade of running hot, a result, certainly, of the Eurozone's decreasing level of imports from Asia.
The U.S economy remains, by most indicators, to be in a state of reduced growth at the least, and perhaps close to a new recession. It is this fact, paradoxically, that is keeping the market afloat. Why? The weaker the economy, the more likely the Fed will intervene with some new form of stimulus. And, while Fed chief Ben Bernanke just finished telling the market not to expect anything at the moment, Wall Street seems convinced that it is only a matter of time, perhaps as soon as September, that the next dose of quantitative easing will be introduced. This may be exactly what investors are counting on to goose the equity market, and what may be keeping investor interest in equities right now.
However, if some untoward "event," such as bad news from Europe or poor jobs numbers out of Washington, hits the market before any stimulus is introduced, the low summertime volume could act as an amplifier for any market sell-off.
Should that occur, it would be those investors who are prepared for such an event that will survive the summer without getting burned.
Consider taking advantage of the low VIX price at the moment, and introduce it into your portfolio as a hedge, a relatively inexpensive form of sunscreen.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week's "What the Periscope Sees."
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