So here we are—stuck in an environment of uncertainty regarding the debt crisis in Europe and declining expectations at home. The S&P 500 Index is back up to 1,200 and seemingly, those trading the index are benefitting from all the volatility. Index options traders must be relishing the current trading action in stocks and no doubt this choppiness is here to stay.
During the Federal Reserve’s Open Market Committee meeting on September 21, the Fed pulled yet another rabbit out of its hat of monetary tricks. From what increasingly appears to be an empty hat, Fed Chairman Ben Bernanke pulled out a $400-billion plan to buy long-term treasuries while selling short-term bills and notes held by the Fed. The expected net result will be to narrow the yield spreads between long and short maturities of U.S. treasuries.
I find it surprising that the stock market reacted so strongly to news of weaker gross domestic product (GDP) growth and consumer spending numbers. It seemed fairly obvious that this was going to happen and the recent trading action in stocks suggests to me that institutional traders were just waiting for a catalyst to sell. They know that corporate earnings are decent, but with the S&P 500 Index right at the point of breaking its 50- and 200-day moving averages, the selling was pronounced.
It was not what traders were hoping for, as the second-quarter gross domestic product (GDP) came in at a meager 1.3%, well below the 1.7% estimate. And making matters worse was a downward revision in the previous first-quarter estimate to a dismal 0.4% from 1.9%.
While the price of gold and price of silver continue to be very strong, a lot of gold stocks and silver stocks have been pulling back in price. It’s a reflection of the current state of things, with investor sentiment seemingly stuck in a rut. We’re in a market with so much uncertainty that any call is valid and all outcomes are plausible. The stock market could completely fall apart, stay the same, or advance. A market malaise has set in and it’s almost entirely due to the sovereign debt situation.
Since the financial crisis, the global equity markets have shown a solid turnaround before witnessing some sort of risk aversion during 2011, as the European problems continued to worsen. Asian equities have been the worst-performing markets year to date, whileU.S.markets ranked amongst the top performers.
In reality, we may be seeing a bottom, but will have to wait for several more months to see if housing prices pick up. We also need to see a positive gain in the index. As long as the overall home prices continue to decline, it cannot be good.
The reality is that the continued weakness in housing impacts wealth and consumer spending, and could drive a double dip in the most extreme circumstances.
The S&P 500 Index is inching its way back up to the 1,300 level, and this makes me feel a whole lot better about the health of the equity market. Recent trading action in both stocks and commodities suggests to me that we did in fact experience a correction, albeit one without a catalyst. The sovereign debt issue in Europe certainly weighed on sentiment and domestic economic data haven’t been strong. But, I do get the feeling that the tide is changing and institutional investors want to be buyers of stocks.