The Investor

A Bush Market Bounce?

One could buy it if there was serious buying.

By 9.10.04

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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.

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About the Author

Lawrence Henry writes every week from North Andover, Massachusetts.