Traders May Want to Start September on the Sidelines

by Sam Collins | August 30, 2012 2:48 am

In a typically slow, pre-holiday session on Thursday, U.S. stocks traded in a narrow range with light volume. The news, however, was mildly positive with the Federal Reserves’ Beige Book saying, “Economic activity continued to expand gradually in July and early August.”

Pending home sales for July improved after declining in June. It was the highest number of pending home sales since April 2010.

The expectation of a major announcement from the Fed at the Jackson Hole, Wyo., meeting is high. But stocks have tracked higher all month, and so the consensus is that an announcement should have little impact on stocks.

At Wednesday’s close, the Dow Jones Industrial Average was up 4 points to 13,107, the S&P 500 rose 1 point to 1,410, and the Nasdaq gained 4 points at 3,081. The NYSE traded 509 million shares and the Nasdaq crossed 297 million. Advancers exceeded decliners by about 1.5-to-1 on both exchanges.

VIX Chart
Click to Enlarge

The CBOE Volatility Index (VIX), sometimes called the “fear index,” has moved over 30% from its mid-August low. Although it is still below what is considered a very significant area, it is telling us that uncertainty is increasing in the market, and that if the trend continues, we could expect more volatile price movement in September. Unfortunately it does not tell us the overall direction of that volatility.

UUP Chart
Click to EnlargeTrade of the Day Chart Key


The U.S. dollar has fallen versus a basket of currencies based on the European Central Bank’s (ECB) attempts to shore up the euro. But while Mario Draghi has been courting the Germans, The Wall Street Journal reported that German Chancellor Angela Merkel arrives in China next Thursday at the head of the largest German business delegation to visit that country. China’s economy has been reported to be in deep trouble, and so the trip is most likely an attempt to have both Europe and China increase trade and therefore help both sides. With this in focus, compared to the rest of the world, our economy appears relatively strong.

Technically the buck, as evidenced by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP[1]), is still in an uptrend, and for the moment has found support at the 200-day moving average. But another round of QE would weaken the dollar and most likely plunge UUP back to its trendline at $22.

Conclusion: As we put the summer behind us and enter September, increased volatility is almost certain — and so is the likelihood of more headlines that will have an impact on trading. The shift in economic news, it appears, is back to Europe and away from the Fed.

A weaker dollar usually means a stronger stock market even as we head into the weakest month of the year for stocks. Confusing isn’t it? Thus, the best bet is to stay on the sidelines until Mr. Market tells us the direction of his next move.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

  1. UUP:
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  3. click here:

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