Morning Thoughts August 28

Good Morning

First off a little cautionary note; on average the last week of August is slow going in the stock market.  The key word there is ‘average,’ which certainly doesn’t make it a rule.  As we have come to learn, anything can transpire in a centrally planned market and thus we would be wise to remain on our toes even in this last real summer week of 2012.

Since the last low in stocks in early June, much has been thrown at this market but almost nothing seemed capable of moving the tape more than a dozen basis points lower here and there.  Even last week as the S&P 500 had its first down week in in six ( a whopping -0.40%), stocks rallied on Friday to recoup some of the week’s losses.

None of this comes with too much surprise however to the ardent student of the market who knows to check under the hood every once in a while.  For if we dissect the S&P 500 for example into its sectors we would that not only have they had an uncanny positive correlation in recent weeks but also that some of the previously lagging sectors such as energy have caught up and are in the green for the year (energy is the lower blue line).

Of course the ‘strong like garlic breadth’ market of late also shaped a scary tight trading range.  If we look at something called the average true range of the S&P 500 which measures in my case the five day exponential moving average of the daily trading ranges we see that in the low teens as it currently sits, it is historically very low.  As we head into the traditionally more volatile months of September and October it does not take much imagination to see this low daily trading range not lasting much longer.

Back to the bull case however and I’d like to point to a simple formula of mine: Under-invested Portfolios & A Scared Public  = Goldilocks markets (that rise regardless of the bears all around).

While yesterday’s late day ‘sell-off’ didn’t give  yours truly a particularly strong case of the ‘warm and fuzzies,’ I am still operating with a mental upside target of 1440 on the S&P 500 and am not much interested to lean to the short side anywhere above the 1400 line.






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