The stock market rally from March 2009 reached a peak at about 1220 on the S&P 500 in late April of this year. A 15% decline brought prices to 1040 a month later. A short rally was followed by a retest of 1040 early this month. When that level held, traders were emboldened and pushed prices up by about 8% over the two weeks through this past Monday morning. This week has not been pretty, but neither has it done any significant technical damage. It has, however, issued a few warning signals.
Though still not strong, volume has risen on this week’s declining days compared to the low volume that characterized last week’s rally. That rise continues a longer pattern of weak volume on rallies and rising volume on declines, the opposite of what normally occurs in healthy markets. Today’s volume was extremely high on a day with some market averages up and some down. The extraordinary volume resulted from the annual rebalancing of the numerous Russell stock indexes and had nothing to do with a bullish or bearish market tendency.
Monday, Tuesday and Thursday saw aggressive selling into the closing bell. In each instance a short-term oversold condition was created that normally leads to a relief rally for a few days. That no such rally was able to take hold indicates an unusual lack of short-term buying interest.
Fear has become a prevalent emotion, and is becoming evident in the world’s bond markets. Short-term U.S. Treasury Bills have provided yields just above zero for the better part of the past two years. When the financial crisis was at its peak in December 2008, the 10 year U.S. Treasury Note reached a low yield of 2.08%. As rescue efforts rekindled investor confidence, yields almost doubled to 4% just three months ago. As fear has reemerged, yields have dropped to 3.11% and seem to want to go lower.
Foreign markets reflect a similar condition. Money is pouring into bonds of the most secure countries with Germany at the top of the list. Spreads between German yields and those of riskier countries are widening.
In both the equity and fixed income markets, investors are backing away from risk and are seeking the shelter of risk free securities, even if yields are miniscule. For many, the prime objective is the return of their money, not the return on their money.
Having experienced a rocky week in the stock market, investors are looking to next week with some trepidation. G20 leaders are meeting in Toronto this weekend and may attempt to bolster investors’ spirits with a positive statement. There are, however, major differences among G20 countries. Some are attempting to introduce new austerity programs, while others, the United States included, want to add more stimulus despite monumental government debt levels. We’ll see whether common ground can be found.
The U.S. stock market remains somewhat oversold and in need of a rally. If new buying power does not soon materialize, however, prices might retest the double bottom around 1040 on the S&P 500 as early as the coming week. A bounce off that level might be enough to produce more confident buying. A break below 1040 would likely magnify the level of fear and could initiate a much larger round of selling.
The next week or two could go a long way toward determining the market’s direction for the summer.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.