It is not uncommon to see a rally begin or start around a holiday. Recently that was exactly what occurred before the Labor Day holiday. On August 25th the S&P 500 Index traded as low as 1039.83. Since that low the S&P 500 Index has rallied higher by nearly 10.0 percent. Yesterday the S&P 500 Index closed at 1142.00. This rally has been very explosive when you look at the size of the gains in such a short amount of time.
It is very important to realize that there are a few problems with this huge point rally. The first and most obvious negative for this rally is that the volume in this surge higher has been extremely light. In normal times when the markets trade higher on light volume it is often a sign of weakness. However, a case can be made that since the March 2009 low the volume has been light on almost every move higher in the market. Is this just the way it is now or is this a giant warning sign of things to come? Only time will tell.
The other major negative for the stock market is that the stock indexes have seemed to struggle in 2010 despite the huge amount of stimulus in Europe and in the United States. It is important to remember that if things were really better in the world the central banks in the United States and Europe would not have the overnight bank lending rates at or near zero percent. In the United States the Federal Reserve Bank has kept the fed funds rate(overnight lending rate to the large major banks) at zero percent since December 2008. We can all remember what damage the Federal Reserve Bank Chairman Alan Greenspan caused when he lowered the fed funds rate to 1.00 percent in 2002. That low rate in 2002 could have very well been the cause of the 2008 credit crisis that rattled the world markets.
The next major negative for this rally is the recent decline in President Obama’s approval rating. The late great Sir John Templeton used to say, “as a president’s approval rating goes, so goes the market”. We can all remember what happened to the stock market in 2008 as President Bush’s approval rating plummeted. It lead to one of the greatest stock market declines in nearly 100 years.
Remember 2010 has been up and down all year. This afternoon the Federal Reserve Bank will announce their rate decision. The market is not expecting any surprises out of the U.S. central bank and rates are very likely to remain unchanged at zero percent. While these markets have exploded higher in the past three trading weeks it is now getting a little overdone and likely a time start worrying again.
Nicholas Santiago
Chief Market Strategist
www.InTheMoneyStocks.com
