With the S&P 500 jumping an eye popping 30.96 points (2.95%) today, it's easy to think that happy days are here again. This is especially true given the dire feeling that surrounded the equity markets just a couple of sessions previous. But, as I've been saying for more than a month, today's price action was merely another instance of a big move within the 1,010 to 1,131 trading range that has been in place since early July. As such, there's no real reason to view today as significant in any way. Aside from the fact that prices are still range bound, today's volume reading of 3.9 billion shares on the S&P 500 continued the general lack of conviction that has plagued this market all summer long. While volume readings during rallies have improved relative to those on down days of late, the absolute level of volume is the key measure here. Normally, a fully participated equity market (as judged by the S&P 500) should see volume readings around the 5 billion share level. If my memory serves, 4.5 billion shares has been about the best volume day we've seen since late June, with 3.8 billion shares constituting the average over this time. To an extent, this is one of the primary reasons why trading has been mired in its recent range. Until more widespread participation returns, I'll continue to discount nearly any move the equity markets make as temporary and fleeting, much like the conditions within the eye of a hurricane.
The Treasury market saw heavy selling today as the euphoria of the equity markets help drive investors (what few of them there are right now) from their defensive positioning and into more risk-based assets. The 10-year Treasury note saw its yield rise over 10 basis to 2.5766% while 30-year yields climbed nearly 13 basis points to 3.6499%. To be sure, the scale of these moves is significant, but, given the broader context of the marketplace (limited participation), it's hard to see these moves as anything more than temporary setbacks. Considering that yields are still not yet back to the levels that were seen last Friday, it's hard for me to say that we're seeing any kind of significant reversal. As I mentioned in previous posts, I was concerned that a sell off in Treasury securities was coming and I think you're beginning to see the relief selling set in. So far, as expected, the move has been significant and swift, which is a typical sign of an oversold/overbought market condition. Given the concerns I have for the remainder of the year, though, I think that now is a good time to consider adding Treasury exposure to portfolios if you have little or no allocation to them. While I still remain somewhat skeptical about the potential appreciation that is left in these securities, they are a classic hedge against deflation and, therefore, warrant at least some ownership. For my part, I would prefer to keep exposure in the 10 - 15% range.
As many of you are aware, I recently took a more bullish stance on gold, due in no small part to my concerns about economic performance through the remainder of 2010. It's ability to move higher amidst an uncertain market environment coupled with shallow price corrections further aided this bullish bias. With that said, though, I can't help but remain cautious on the yellow metal. The fact that gold has not previously challenged it high price of $1,265 is one of the primary reasons that I've been unable to pull the trigger and buy. In my experience, security prices typically do not move through to new highs without trading at or near these previous highs for some time. Think of it is as a pane of glass. You can get through it, but it normally takes a few stabs to finally break on through. This is exactly what gold did prior to its breakout last year. This time around, though, gold sold off from its highs in a relatively swift manner and has been on an upward path ever since with virtually no pullback. This methodical series of marginally higher closes, frankly, concerns me. Too many times I've seen price action just like this foreshadow a turn around in prices. If you recall the price action in the three months leading up to the S&P 500's top in April of this year, you'll see that prices moved ahead in a very similar manner to what gold is currently experiencing. As such, I just can't bring myself to pile in here. This may mean that I miss out on a gold's next move higher, but, at this point, I'm willing to take that chance, especially when the risk of significant inflation is currently quite low. The opportunity cost associated with holding cash, therefore, isn't all that significant.
I guess I would be remiss if I didn't at least say a few words about today's economic reports. Simply put, the ADP employment figures were bad. According to its survey, private sector employers shed about 10,000 jobs during the month of July. Any way you try and spin this reading, the result is negative and reflective of the weakness in the domestic economy that many have grown concerned about. While this report is somewhat irrelevant to traders since the BLS' jobs data is typically given more weight, this is none the less a decent insight on the condition of the private sector's job conditions. Surprisingly, this did little to damper the buying spree on Wall Street. Apparently, the Institute for Supply Management's index of purchasing activity was the data point of choice today as its reading of 56.3 defied the market's expectation of 53.0. To be sure, this was a good reading, but not the sort of the data that pushes a market up 3% in a day. And since the Federal Reserve's own survey of purchasing activity has shown weakness of late, it's hard to say that this report is the definitive work on the subject. If nothing else, the divergence between the two surveys further reinforces the confusion surrounding domestic economic performance in coming quarters.
While I certainly am not buying into today's euphoria, I must admit that it's nice to see a little green on the screen for a change. Perhaps it's because I don't think there will be much to be seen for the rest of the year. I hope I'm wrong. Looking forward to tomorrow, I don't have a good sense of where things are likely to go, but given the fact that the S&P 500 finished the day right below its 50-day moving average, I would think that traders would be hard pressed to move prices higher. But, again, in this environment, much of the conventional logic appears to be null and void. I'll continue to keep an eye on the Treasury market to see if the selling of late is anything more than a temporary phenomenon, but I suspect this won't prove to be the case. Next week can't get here fast enough. Until tomorrow....
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