Some investors were miffed, others were worried but most were confused simply because the markets did little this week. Like junkies needing more juice, the bears can’t wait for the markets to crater while the bulls see no reason why the summer rally should not continue. Yet remember that this, the last week in August and the first week in September, traditionally are slow weeks with many market participants away on vacation.
Hopefully, those market mavens are here in the Berkshires enjoying their time off and maybe they are since I did read that the Berkshires actually gained employment in July. Anyway, after Labor Day (the unofficial end to the summer season), both bulls and bears will come back to the markets.
Clearly, August was a low volume month although that did not stop the Dow, NASDAQ and the S&P from making new highs for the year. Sure, say the bears, but it was on very low volume and the only days when the volume picked up is when sellers took over. The bulls say so what: volume has been skimpy since the beginning of this rally. They argue that volume will pick up because at some point all that money sitting on the sidelines will be forced into the market as the averages continue to climb.
Market commentators have also been making a big deal about four financial stocks—Citigroup, Bank of America, Fannie and Freddie Mae, the two government-owned mortgage giants—which have accounted for more than 30% of the NYSE volume since early August. If you add AIG, the troubled insurer, to the group their share of NYSE volume rises to 35%. That, says the bears, spells trouble for the markets since it reveals both the speculative nature of the recent moves higher and the lack of participation by investors outside of a handful of big day traders like Goldman Sachs, JPMorgan, Credit Suisse and a few hedge funds. Speculative because all of these five stocks are in the financial sector and in trouble and none of them would have survived the financial crisis without the continuing aid of the government.
In addition, this week some good economic numbers failed to get a rise out of the markets which hasn’t been the case up until now. Previously, every statement, statistic or rumor of good news was met with a market rise. Bears say it is a sign the recovery has already been discounted by the market now and investors will begin to sell the good news with increasing frequency.
Maybe so, but bad news is not having much impact on the markets either, consider Friday’s front page headline of the Wall Street Journal, which read “Banks on Sick List Top 400”. The story warned that the banking industry continued to deteriorate with 111 new banks moving onto the endangered list in the last quarter. The markets were actually up in the morning despite that news and finished mixed for the day.
Many advisors and Wall Street strategists are expecting as much as a 10-15% pullback in the averages during the next two-three months before regaining momentum at the end of the year. Most of them offer two justifications for this view. The belief that the markets have gotten ahead of the fundamentals and that September and October are historically down months in the stock markets.
I admit that both points are well-taken but I become suspicious when everyone is expecting the same thing. At the same time, most advisors say they will use any pull back as an opportunity to buy more stocks.
“If that’s the case,” said a new client and an old friend in the area, “why would the markets pull back at all? Those who have been waiting to get in will just buy any dip. Haven’t they been doing that all summer?”
Yes they have and that’s what makes forecasting market turns such a difficult exercise in this kind of environment. I believe investors will continue to buy the market on dips while betting that the increasing stream of good news on the economy will justify higher levels in the stock market.