Investors Fret And Hold While Traders Trade The Volatility

Family is a beautiful thing … Our family just got a lot bigger with the addition of my first grandchild, a granddaughter named Rachael.  Actually, now that I think about it, families are much like intermarkets.  Adding a family member influences the rest of the family, just as one market influences another market in a group of interconnected markets.  To understand one family member, one has to understand the influences the others exert upon that individual, as well as the influence of the family as a group.  Rachael has entered our family and the dynamics have changed with an influence on our family much bigger than her temporarily tiny self.  What a difference a baby can make.

To extend the metaphor, once again the “family” of Europe is in the news.  Banking regulators meeting in Basel are discussing new financial regulations for the somewhat disjointed banking system of Europe.  This action has pushed the U.S. equities market down, the U.S. dollar index up, and it has sparked new concerns about economic problems in Europe, which has pushed the price of crude oil down on the fear of a slowing global economic recovery.  The euro is also sliding slightly against the U.S. dollar and the European equity markets are in retreat.

Is this a sign of a strong market downturn, or is it more of what has been going on since May in the market?  Looking at the 6-month chart of the Share Price Index 200 below gives a clue.

Source: VantagePoint Intermarket Analysis Software

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Note, the intermarkets that make up this index are a combination of currency markets, commodity markets, European and Asian indices, and various iShares IDX markets.  This market in particular is interesting to watch as this combination of intermarkets covers the gamut of markets that the broad market looks to for guidance.  As the chart shows, in April, the Share Price Index 200 turned strongly down into the middle/end of May, but since then has gone up and down and is currently down from the peak in April.  One might conclude that unless some terrible economic news comes out of Europe or Asia, the pattern will continue.  The PIndex and the PStochastic support this possibility.

The news that could change this pattern would be if the European banking regulators impose new levies or taxes on the banks in addition to tougher regulations, or if the concerns about banks having more risky debt on their books than has been previously reported in the “stress tests” turn out to be more than mere speculation.  Other news that could change the pattern is more of what came out of Germany today – an unexpected month over month decline in manufacturing orders (July). 

Overall, uncertainty is still the frame around the market, and as long as the news overall is a mixture of bad, not so bad, and some good, expect that the market will continue to bob up and down as investors fret and hold, while traders trade the volatility.

Best Wishes,

Lou Mendelsohn