The Lackluster Quarter Begins

Ahead of the Street Column, by Mitchell Clark, B. Comm.

The third quarter could be a tough one for the stock market. We had a very good bounce off the March low and now the marketplace just doesn’t seem to have any defined sense as to where stock prices are going to go.

Second-quarter earnings season could change all this and, from what we’ve experienced so far, daily economic data can have sway on investor sentiment. Current trading action could be the actual period of consolidation that so many have been looking for. At the end of the day, the stock market just can’t follow the same upward trend forever.

Some of the strongest stocks in the marketplace are now taking a very pronounced break from recent capital appreciation. If you want a sign of the broader market making a new upward trend, I’d follow U.S.-listed China stocks as well as the NASDAQ. There is a sense of frustration among traders in that the future is just so uncertain and this makes it more difficult to make money from the stock market. Without any defined trend, trading for a living isn’t as easy.

One trend that seems to be holding up is the price action of oil and gold being commensurate with stock prices. Gold still looks to be solidly based over the $900.00 per ounce level, but oil has experienced a definite pullback from recent price strength. Clearly the price action in that marketplace up to now seems to have ignored actual demand and supply data for the commodity.

Often, the third quarter of the year can be fairly lackluster for the stock market, whereas fourth-quarter trading action can pick up a lot. I think it’s reasonable to predict that this scenario will play itself out once again.

Previously, I wrote that, if there were to be any pronounced consolidation in stock prices, it likely would be a great opportunity to go long on the market. I still think this way, because the marketplace still wants to look forward, not backward. Investors still want to bet on the future — a future that’s better than the recent past we just experienced. A solid period of consolidation in stock prices is a healthy development after the strong run we’ve experienced since March. We have a long way to go before stock prices get to where they were before the subprime credit crunch took hold, and it’s going to take a lot of buying from institutional investors to get back to those levels. For now, stock prices are vulnerable to more retrenchment.