Business reporting in general, including stock market reporting,
tends to be superficial. So when, during the Republican National
Convention, the Dow-Jones Industrial Average staged a one-day pop
of 120 points, media types started talking and writing about a
“Bush bounce” in the stock markets.
Looking back — if they bothered — the reporters could have
seen that the market averages had been rising for much of
mid-August. The NASDAQ had clawed its way back past a key support
level at 1821. The big-focus Dow was back over 10,000. If any of
the popular press took a more serious look, they also found that
the S&P 500 had finally reclaimed its 200-day and 50-day moving
averages, a significant technical move.
Look a little deeper, and you’ll find what most serious market
watchers have found: This “rally” has no conviction behind it. How
do you measure conviction? With trading volume. Without the
enthusiastic support of institutional traders, especially of mutual
funds, no rally can last long or go very far. And during the summer
generally, and in this latest bump particularly, the volume on the
New York Stock Exchange and the NASDAQ has scarcely exceeded a
billion and a fraction shares a day — less than the long-term
daily average trading volume for both exchanges, and a clear signal
that institutions simply are not doing any serious buying.
On the positive side, the advance-decline lines — the ratios
between numbers of advancing and declining stocks — look pretty
good, and have definitely improved. Some new market leading stocks
seem to be breaking out. But stock breakouts have also had a clear
tendency to fail, and fail pretty quickly. Plus, the kinds of
stocks breaking out, steel, textiles, industrials of various sorts,
make up what are known as “defensive” issues, the kinds of things
you invest in when market conditions are iffy.
What is worst, the stocks that really ought to lead a
high-flying kind of rally have absolutely tanked. The semiconductor
index ($SOX) has almost utterly collapsed, most lately hit hard
with future profit warnings from Intel (INTC). Medical and biomed
haven’t done awfully well, either. There has been a kind of
mini-rally in banks, a positive sign, but if you analyze the
best-performing banks (regionals, especially from the Southwest),
you find that they are already trading at price-earnings ratios
more than twice what their sector justifies — at around 26 versus
a historic sector average of 12. That means they’ve already been
bid up, and may not have much farther to go.
This post-Labor Day week could be pivotal, however. The big
trading house machers have come back to their desks from their long
lazy summers in the Hamptons. If there’s anything to be bought,
they’ll buy it. By Friday, when this column appears, we’ll know a
lot more. Watch the daily volumes on the NYSE and the NASDAQ. If
those numbers start to poke up towards 1.8, 1.9, or even 2 billion
shares a day, then there could be a meaningful rally — or
meaningful selling.
There’s one final hazard out there, having nothing at all to do
with a “Bush bounce” or election worries, or anything political at
all. At the end of September, fund managers square their yearly
positions. Last year’s big rally, which started in March, got
slaughtered in late September, though it posted an up leg of some
significance after that, lasting through the end of the year. The
September slaughter could happen again.
Of course major news events do affect the stock markets. But the
idea of a “Bush bounce” (or of a “Kerry collapse”) really doesn’t
figure much in the strategies of big time money managers. Watch the
price and volume action. That’s really all you know, and all you
need to know.
