A Week of Indecision

Despite swinging more than 37 points from top to bottom during the week, the S&P 500 closed down 2.43 during today's session to 1,146.24.  Trading volumes were once again lackluster (3.6 billion shares on the S&P 500), which continues the trend that has been in place since May.  Not exactly the type of price performance that gets bulls or bears too excited.  The fact that volumes have not surged since the end of the summer suggests, to me, that retail and institutional investors alike see very little reason to participate in the equity markets at this point in time.  Depending on your point of view, this could be a bullish or bearish indication.  For my part, I view this agnostic stance by investors as a reason for concern.  Bullish markets expand their participation as they move higher and this clearly hasn't been the case these last few months.  In fact, it's no coincidence that the equity market's April top occurred at the point in time when volumes began to dry up and is one of the primary reasons why I regard volume readings as highly as I do.  Concerns over the need for additional monetary stimulus (ie, a slowing domestic economy), sovereign debt worries, and continued uncertainty around Washington tax policy are just a few of the overhangs that are encouraging investors to stay conservative and chase yield.  Regardless of the rationality of these concerns, they are none the less the realities in the marketplace at present and, therefore, must be factored into any forecast of equity prices over the next month.

As you may have seen in a few of my most recent posts, I've been looking at a fair bit of data on the seasonal performance of the major indexes as a way of getting a sense of direction and timing.  While most investors know that September is typically the worst month for the equity markets, I think a much smaller slice of investors would realize that the average loss in the months of January, August, and October are actually greater than that of September.  Simply put, this means that January, August, and October are the riskiest months of the year when/if prices move lower.  As we move into the October period, I think this insight is particularly useful especially when you recall that October 2008 saw a large swath of the fallout from the emerging credit crisis.  The fact that Q3 earnings are released during the month of October could explain some of this downward bias.  And looking at the data on a week by week basis, it appears that the first half of the month is the most challenging period for prices.  As someone who has real concerns regarding the underlying strength of the U.S. economy, this seasonal trend seems to support my short-equity bias for the next few weeks.  But as November approaches, you can be sure that I will be strongly considering paring this position since year-end buying by institutions begin to support share values.

Looking across the spectrum of markets, I think it's clear to see that investors remain cautious.  Agricultural commodities are all seeing prices move higher (To an extent this has been fundamentally driven, but I would argue that the extended gains that have been seen of late are largely momentum driven.).  Gold seems to set a new all time price on a near-daily basis.  Treasuries remain well bid and finished higher for the week.  Oil continues to higher, breaking solidly through the $80 level.  If the collective economic outlook was truly improving, I find it hard to believe that all these disparate markets would be as well bid as they are.  In my view, the strength of these markets is somewhat of an explanation for the light equity volumes as funds are flowing to these various 'safe harbor' assets.  This is yet another reason that I just can't shake my bearish bias.

Looking ahead to next week, we get our first look at the government's estimate of Q3 GDP and home price date from the Case-Shiller Index.  Both should prove market moving.  The real question, though, will be how the equity market reacts when/if the GDP comes in above expectations.  A stronger reading, while certainly supportive of the bulls' case, may reduce the chance that the Federal Reserve will step in with additional stimulus.  This expectation appears to have been solidly baked into share prices, so, counter-intuitively, this could spark a round of selling.  We'll see soon enough, though.

Until Monday.....