Conflicting Signals

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ISI Group technical analyst Jeff deGraaf highlighted a negative volume trend in the stock market’s decline from the April highs and in the recovery from the July lows.  The declining markets saw trading volumes in May and June climb to 116% and 113% respectively of their longer-term averages.  When the markets rallied in July, volume fell to 96% of the decreasing longer-term average.  This trend is usually symptomatic of a weakening market structure.

Ned Davis Research’s studies show a more bullish short-term picture.  Investors around the world are increasingly demonstrating a preference for riskier assets, with volatile emerging markets leading the world’s more established markets.  Such trends are typically bullish until investors reach an extreme level of confidence, which often marks a market top.  Current international readings do not yet look extreme, however, which bodes well for the short-term.

On the domestic front trader optimism, a contrary indicator at extremes, has grown steadily over the past several weeks.  Elliott Wave International reported that the Daily Sentiment Index jumped from just 10% bulls on the S&P 500 at the July 1-2 lows to 73% bulls five weeks later with the index more than 10% higher.  That’s the highest bullish percentage since May 3, just days before the May 6 “flash crash” which saw the Dow drop more than 1000 points intraday.  The ISE Sentiment index, which measures sentiment in the options market, is showing readings almost identical to those leading to the April market peak that preceded the 16% decline to the July lows.

With these various indicators pointing in opposite directions, they obviously can’t all accurately forecast the market’s direction, at least in the same time frame.  They are, however, consistent with the conflicting picture we’re also seeing on the fundamental side of the ledger.  Second quarter corporate earnings continue to come in above expectations, while weekly and monthly economic statistics continue to deteriorate.

This is not a normal environment.  Governments around the world have provided more stimulus than ever before and might provide even more.  At the same time there are countries and banking systems on the verge of default.  We can’t know how this will ultimately work out, nor how intermediate chapters will unfold.  The range of possibilities is huge, and the prudent investor will remain far more flexible than normal to facilitate moving rapidly should events play out in an unanticipated manner.

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 or call (520) 529-2900 to speak with one of the Portfolio Coordinators.