“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” — Friedrich Nietzsche
Expect the market to bounce around sideways until Friday, as Wall Street waits on the top acts to perform at this week’s annual Jackson Hole summit. After that, investors might come away with a clearer picture as to the health, or lack of it, of the current uptrend.
In spite of a week that saw the Dow Jones Industrial Average (DJIA) suffer a weekly loss for the first time since mid July, the Dow has been primarily on an uptrend since early June. While extremely light volume certainly makes that trend somewhat suspect, it has nonetheless managed to boost the Dow by slightly more than1000 points. It is no surprise that the SP 500 Index (SPX) has mirrored the rise of the Dow, of course, but what has been something of a surprise is the fact that the VIX, known as the “fear gauge”, has dropped to its lowest levels in five years. Can there really be so little uncertainty in the current market?
In many ways, the recent rally really doesn’t make a lot of sense.
The domestic economy has routinely been shown to be slowing, as evidenced by stubborn levels of unemployment, sagging GDP estimates and predictions, and sluggish home sales. The most recent quarter of corporate earnings has been tepid on average, in spite of what has been widely acknowledged as generally being a very low bar in terms of profits, growth, and sales.
Also, with the Presidential election just around the corner, it would be expected that the increased level of uncertainty would instill a higher level of volatility into the market, rather than the rock-bottom levels that the VIX has been posting over the course of the last couple of weeks.
A pair of reasons that may be pegged to the market’s continuing uptrend may be found on either side of the Atlantic.
Starting with Europe and its persistent sovereign debt crisis, the seemingly perpetual cycle of promised solutions and broken promises seems to be at a momentary lull. Mario Draghi, president of the European Central Bank (ECB), spoke at a conference in London one month ago and made a bold statement that the ECB would do “whatever it takes” to bolster the ailing eurozone.
Naturally, equity markets went higher, but of interest was that, despite the inevitable failure to make good on that promise, the markets didn’t fall back as far as might have been expected. Even with Germany’s own central bank president Jens Weidmann continuing to dismiss Draghi’s variations on a bond-purchasing theme, investors don’t seem to be as reactive to the in-fighting going on across the pond.
Perhaps it’s a case of Eurozone exhaustion, one that will be overcome either by increased trading volume come September, or by a clear case of success or failure in terms of proffered solutions made by the leaders of the eurozone countries.
The other reason Wall Street has been trending toward the upside is because of the potential impact upon equities should the Fed announce QE3.
The signals have been vague, as is often the case with the Federal Reserve Board, including statements flowing from individual members of the Fed in greater frequency than is common. Meanwhile, Ben Bernanke, the Fed head, has indicated the possibility of some additional easing, while holding off actually implementing any specific action.
Presidential politics may factor into this equation, as any action would likely be interpreted as blatantly political, regardless of either the action or the potential impact. So Bernanke may be sitting out this hand, so to speak, until it’s clear who the next dealer is.
This week may provide a perfect opportunity for investors to make shifts in their portfolios, as both Bernanke and Draghi will be making speeches before the central bankers gathered at Jackson Hole for the annual summit. Should a strong indication of consensus of direction emerge from these two key players on the macroeconomic stage, be certain that investors will take heed, and follow with their collective capital.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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