First off, a little cautionary note: On average, the last week of August is slow going in the stock market. The key word here is “average,” which certainly doesn’t make it a rule. As we have come to learn, anything can transpire in a centrally planned market, and thus, we would be wise to remain on our toes even in this last summer week of 2012.
Since the lows in stocks in early June, much has been thrown at this market, but almost nothing seemed capable of moving the tape more than a dozen basis points lower here and there. Even last week, as the S&P 500 had its first down week in six (a whopping 0.4% loss), stocks rallied on Friday to recoup some of the week’s losses.
None of this comes as much of a surprise to the ardent student of the market who knows to check under the hood every once in a while. For if we dissect the S&P 500 into its sectors, we would see that not only have they had an uncanny positive correlation in recent weeks, but also that some of the previously lagging sectors such as energy have caught up and are in the green for the year (energy is the lower blue line).
Of course, the “strong like garlic breadth” market of late also shaped a scary tight trading range. If we look at something called the average true range (ATR) of the S&P 500, which measures in my case the five-day exponential moving average (EMA) of the daily trading ranges, we see that in the low teens as it currently sits, it is historically very low.
As we head into the traditionally more volatile months of September and October, it does not take much imagination to see this low daily trading range not lasting much longer.
Turning back to the bull case, I’d like to point to a simple formula of mine: Under-invested portfolios plus a scared public equals a Goldilocks market that rises regardless of the bears all around.
While Monday’s late-day sell-off didn’t leave yours truly with a particularly strong case of the “warm and fuzzies,” I am still operating with a mental upside target of 1,440 on the S&P 500, and I am not very interested to lean to the short side anywhere above the 1,400 line.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.