August was not a great month for stock markets. September could be equally disappointing. After months of higher highs, a consolidation phase should be expected but it is not the end of the world.
As expected, from the peak, we have pulled back about 4.5% in the S&P 500 Index in August. As consolidations go, this one has been exceptionally mild. What makes it so painful is that we have all gotten used to one record high after another. We don’t like losing money, even if they are only paper losses. I am putting you on notice that my worst-case scenario would be to expect another 4 to 5% of downside from here. Why?
Although I look at a number of indicators, the market’s technical indicators across the board have started to deteriorate. So much so that it will make future short-term attempts to re-capture the recent highs problematic. Yet, on the plus side, there are some signs that we could be closer to a bottom than the bears might think.
All month I have been looking for a day in which the number of stocks with down volume on the New York Stock Exchange exceeded those with up volume by more than 90%. These 90 % Down Days are quite rare. We have only seen 5 instances of this type of behavior in 2013. In every instance, these readings occurred near the lows (3-5%) of their respective pullbacks.
On Tuesday of this week we had a 92% Down Day on the NYSE. However, the event had some shortcomings. Ideally, you want this kind of sell-off (capitulation) to occur after a dramatic decline. Instead, the markets had rallied to new recovery highs prior to Tuesday. It was also a news-induced event, which lessens its significance. The catalyst for the decline was reports that the U.S. and its allies are planning some kind of retaliatory strike against the Syrian regime for its alleged role in gassing its own citizens. So Syria, As a result, any rebound we may get over the next few days should not be believed.
I suspect that at the earliest, we will not be out of the woods until after the Federal Open Market Committee meets again on September 18th. In the meantime, the debate over whether the Fed will begin to curtail their stimulus program at that time will occupy the headlines and the market’s attentions. Back in July, I also warned readers that “we are entering that time of year when our dysfunctional political parties may once again roil the markets in an attempt to justify their miserable existence.”
Over the next two months, be prepared for the politicians to resurrect all the battles of yesteryear: the debt limits, the deficit, the budget, Obama care, etc. This could be the excuse markets need to spend a month or two more consolidating the gains we have experienced since November of 2012.We could see another 4-5% downside in the meantime. That would be my worst case scenario. Overall, that’s not much of a decline given the market’s recent gains.