The extreme up and down volatility continues, and the sudden moves in both directions continue to whipsaw the expectations of Wall Street and the media, which staggers back and forth between “the recovery is on track” and “doom and gloom lies ahead”.
Right now we’re back to the consensus being that the economy is OK, the recovery on track.
However, can we trust that to be the final answer?
Looking back, the market topped out in late April almost in perfect timing with historical seasonality rules to Sell in May and Go Away. By early June with the market down 13%, the consensus opinion was that we were in for a significant correction in the unfavorable season. The economic reports from April and May were mixed, but the focus was on those that were negative, and fears rose that maybe the recovery was stalling with the expiration of the home rebate program.
But then the market suddenly spiked up in a two week rally in June that pushed those negative thoughts aside. Everything was probably alright after all.
Then after that two week rally had optimism back, the downside suddenly resumed to a new low in a two-week correction from mid-June to early July, that had the S&P 500 at a new low for the year, down 17% from its April peak. And back came all the gloom and doom talk, with the conviction being at the July low that not only was the recovery stalling, but a double-dip all the way back into recession was possible.
No sooner had that gloomy conviction taken over but the market surged up in July, and into the first week of August. And that rally had everyone convinced again that the low was in for the year, that although the economic reports were worsening, that would only force the Government to produce more stimulus programs.
However, just about that time, five weeks ago, the market plunged again, and in three weeks produced the worst August in 9 years. And that brought an onslaught of fear again, especially with the typically negative months of September and October having arrived. Archaic ‘indicators’ like the Hindenburg Omen, and Death Crosses, predicting huge declines, began spreading over the Internet and into financial publications, and even talk of a crash being likely in September.
But once again the market was short-term oversold beneath 21-day moving averages, and it launched into what has been another impressive short-term spike-up over the last two weeks.
And here we are again, with the negatives being ignored (auto sales collapsing in August, the ISM service sector Index declining to its lowest level since January, sales of machinery and computers suffering their biggest decline ever recorded in August, etc). Instead the few positive reports which have been either fractionally positive, or not as bad as forecasts, are being singled out to prove that this time the recovery really is back on track, and the stock market volatility has ended. Some of the major indexes have broken fractionally above their long-term 200-day moving averages. Intermediate-term MACD has triggered a buy signal on some of the indexes. Dow 12,000 here we come.
However, the major indexes are again short-term overbought above their 21-day moving averages to a degree that in normal times usually results in a decline at least down to the m.a., but in this volatility has been resulting in declines to back sharply below the m.a.
So be careful.
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