Insights & Advice

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Back in the Range

Bulls gave it their best shot last week but it wasn’t good enough. No matter how much they tried, they just couldn’t break that 1,130 level on the S&P 500 Index. And like jilted lovers, all the averages retreated in frustration. The question is how long will this range-bound market continue?

Uncomfortably somber comments from several members of the Federal Reserve has soured July’s festive mood. The market’s better than 7% gains in July were the best in a year and had many hoping that the five month correction had finally ended. I suspect that won’t happen until investors are convinced we are going into another recession and the market averages reflect that fear. Until then, we trade in a roughly 100 point range on the S&P 500.

I do expect the S&P 500 to ultimately fall to 950 or so sometime over the next few weeks or months. But I, for one, don’t expect a double dip recession.

“But even Bernanke says the economy isn’t doing all that great,” protested a client at this week’s Chamber event in Pittsfield.

Unfortunately, Ben did own up to that fact, I said. What’s worst is that the Fed is just about out of arrows in its fight to pump up the economy. With rates practically at zero, last week’s announcement that the Fed won’t be downsizing its balance sheet but instead spending any incoming monies in purchasing Treasury bonds was greeted with disappointment. They wanted the Fed to do more.

“So what was the market thinking in July, that the economy was going to come roaring back?” asked the owner of an engineering company in Berkshire County, who had joined our discussion.
“Just the opposite”, I explained, outlining my theory.

I believe that all through the summer, the jobs data, retail sales, the housing numbers, etc. were indicating a slow-down in the economy as some of the government’s stimulus efforts wound down. Traders bought the market betting that the numbers would get even worse. They incorrectly believed that the slow down would force the government and the Fed to announce something “big” to goose the economy once again. The news would cause the markets to skyrocket and traders would make a killing. Reality, in the form of last week’s paltry accommodative effort by the Fed, knocked the wind out of that play.

“Yes, but maybe Obama will do something, a second stimulus package, for example?” asked a well-dressed woman, who had joined the swelling group under a big white tent.

“He could, but I doubt it.”

I explained that two thirds of the stimulus plan funds are only now being spent, just before the November elections. Like politicians everywhere, the Obama Administration and the Democratically-controlled House and Senate deliberately held back spending that money in order to help their re-election campaigns. I’m sure the GOP would have done the same if the tables were turned.

The end result of that maneuver is we really won’t know if the stimulus plan has failed (as the Republicans claim) for months down the road. The Obama Administration is certainly not going to launch another plan until they are sure of success or failure. Besides, if the President did announce such a program now, he would implicitly be admitting that his first plan had failed. You don’t do that with elections less then four months away.

So where does that leave the markets? Short-term, we are oversold. Expect a bounce next week. We are locked in a trading range of which we are in the middle. If you are in securities that pay interest or dividends then you are where you want to be. Everything else is a fool’s game until this low volume, volatile market comes to a climax. That could be weeks, if not months away, so be patient.

Posted in A Few Dollars More, At the Market