Higher? Lower? Who the Hell Knows?

The binary trade (everyone's either a buyer or a seller, with no one in between) among most of the major markets continued yet again today.  The S&P 500 index was up 6.78 points, or 0.61%, to close at 1,127.24 as traders looked upon ADP’s estimate of private sector employment growth in July (42,00 positions added versus an expectation of 30,000) as a sign that the prospects for job creation within the economy are improving.  The fact that the July numbers were more than double the 19,000 level reported in June only added to the positive nature of the report.  As if this wasn’t enough bullish data, the Institute for Supply Management released its monthly report on the health of the service economy with a July reading of 54.3 (any number above 50 implies expansion of business activity).  Compared with expectations of 53.7 and the prior month’s reading of 53.8, the ISM data certainly conveyed the sense that the domestic economy is continuing to grow at a modest rate.  Taken together, these reports helped push the S&P 500 to its highest close since May 17th, though still below the intraday high of 1,131 seen on June 21st, which puts a damper on this near term milestone.  For whatever reason, the equity market seems unwilling to push through the 1,131 level for now and appears that there is little on the horizon that will catalyze things one way or the other.  Volume continued to evidence this lack of conviction, posting a meager reading of 3.3 billion shares. 

Interestingly, the Dow Jones Transportation Average continues to move in an exaggerated manner relative to the broader market averages.  For the day, the Transports finished up 1.43% versus the +0.61% performance in the S&P’s and +0.41% seen on the Dow.  Though widely looked to as a leading indicator of the broad market, the scale of the divergence between these indexes and the Transports is a bit surprising.  Today’s ISM numbers were no doubt uniquely supportive of the index’s move today, but I find it hard to believe that a nearly 1% out performance is justified.  It is possible that investors may be looking to use the Transports as a preferred means of gaining equity exposure in this environment, thus bidding up prices when things are positive and selling off hard when things turn sour.  This preference could be the reason why the index is seeing increased volatility, but this is only a hunch on my part.  As someone who is currently long the Transports, this ‘high beta’ trading action is definitely not something that was expected going in and is making ownership a little tougher to swallow given my risk parameters.  Oh well….

Looking at the chart below, you can see that momentum indicators are still on the bull’s side at this point, but the longer the S&P 500 lingers at or just below the 1,131 level, the less likely a pop to the upside becomes.

In much the same manner as equities, gold finished higher today at $1,194.80/oz., but below its near term high of $1,204 (see chart below).  Traders tried to punch through this level early in the session, but had to settle for a close near the mid-point of the day’s range.  I suppose the higher move in the U.S. Dollar today could have proved to be gold’s downfall, but the trade of late has been so disconnected from global currency trends that it’s hard to say this with any real confidence.  More than anything, I suspect that gold and currency traders alike are mirroring the indecision that has plaguing nearly all major markets for the past few weeks.  What will be needed to break this malaise is truly the million dollar question.  For now, I have no idea what that catalyst will be or when it will materialize.

So with so many markets stuck in wait and see mode, I’m doing much the same.  I still remain biased towards equities moving higher over the next few weeks, but, again, stagnating price action below previous highs will quickly move me back to the bear camp, especially given my longer term concerns.  Also, the rising tensions in Asia, to me, suggest that the threat of geopolitical actions interfering in market prices is still a distinct possibility.  Just this week China has conducted its largest ever air power exercises in what can only be described as a direct response to the United States’ maneuvers with South Korea.  Furthermore, there are unsubstantiated claims that the Japanese oil tanker M.Star was the victim of a terrorist attack in the Straits of Hormuz.  While these claims are likely to be proven untrue, the fact that additional attention will be centered on this economically critical area of the globe only raises the probability that markets could overreact to any unusual event in the region.  To me, these events further support the notion that a defensive overall posture in your portfolio is warranted at this time.  Though I continue to hold a position in the Transports, equities, in general comprise less than 5% of my overall portfolio, thus keeping a lid on my overall risk profile. 

As a final word tonight, I want to apologize to those of you who have been accessing Fundamentally Technical via Facebook.  For an unknown reason, new posts were no longer being posted on FT’s wall.  I’ve been working on getting this problem corrected and believe that I’ve now got a solution in place.  However, this solution caused a few of the posts to be listed out of chronological order, which I know can be annoying.  Fortunately, this issue should not prevail going forward.  As always, thank you for your readership and please feel free to let me know when you’re having trouble with anything on the site.  Until tomorrow…..