Stocks Need a Little Help From the Headlines

by Sam Collins | August 21, 2012 2:00 am

The Dow Jones Industrial Average and the S&P 500 backed away from a four-year high yesterday following a denial by the European Central Bank that it planned to intervene in the sovereign debt crisis.

At the close, the Dow Jones was off four points, closing at 13,272, the S&P 500 broke even at 1,318, and the Nasdaq closed unchanged at 3,076. The NYSE traded 550 million shares, and the Nasdaq crossed 351 million in a typically slow summer trading session. Decliners outpaced advancers by about 1.4-to-1 on both exchanges.

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Trade of the Day Chart Key

Stock market volatility, as measured by the CBOE Volatility Index (VIX), is at its lowest level since the Lehman crisis. The usual interpretation of low VIX numbers is that prices will head higher, but at extremely low levels, it often reflects a degree of complacency that is counterproductive. In other words, investors are so non-involved that they are not paying attention to either the technical or fundamental characteristics of stocks. When this occurs, stocks often fall sharply for a short time, then rally back.

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The S&P 500 missed making a new closing high by a fraction yesterday as stocks backed away again. As stocks inch higher on low volume and mediocre breadth, our internal indicators fade fast. Note the decline in momentum from early August until now.

Conclusion: Triple tops usually are broken with a high-volume thrust punctuated by many buyers and few sellers. But the current top is anything but usual.

First, for the market to continue its upward momentum, it seems in need of favorable headline news. It certainly did not get that yesterday, as a spokesman for the ECB indicated that no additional monetary easing was being contemplated. If not, then what was Mr. Draghi talking about when he said that he would commit all available measures to solve Europe sovereign problems? Just more euro-babble? And the Fed has made it clear that with the economy gradually improving, it too wasn’t about to authorize more stimulus. That leaves us with the upcoming election. Lately, stocks appear to be inching upward in tandem with more favorable poll numbers for the Romney/Ryan ticket. But is the market “predicting” a Republican victory, or is Republican optimism driving the market?

Hold cash, since the election odds are still even.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[1].

For a list of this week’s economic reports due out, click here[2].

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