Market picture is still murky
Wednesday the Federal Reserve released its latest “beige book,” a report on economic conditions from the 12 Federal Reserve Districts. There was muted reaction from the financial markets, even though the report stated that “most Districts noted that the outlook for economic activity among their business contacts remained cautiously positive.”
Perhaps the lack of enthusiasm from traders and investors was because even though Fed officials are cautiously optimistic that the economy is stabilizing, there are still plenty of signs of weakness. One of the biggest negatives was the uptick in unemployment last week to 9.7%. Of course the real number could be as much as double that level when the long-term unemployed and those who have taken part-time jobs are included.
Many investors were caught off guard by the strength and duration of this rally that began in March. Normally bear market rallies last about six to 10 weeks and stocks rise 15% to 30% before the downtrend resumes. But never before has a bear market been treated with the kind of economic stimulus that we have seen this time.
Traditionally, September is one of the weakest periods for the financial markets. That is also undoubtedly on the minds of many traders who are worried that this rally might be near the end of its run.
The chart below shows that the S&P 500 remains in an uptrend, but momentum appears to be failing.
The middle portion of the chart is a moving average convergence divergence (MACD). It has spent most of the past six months at overbought levels. Normally that would indicate that a downturn is overdue. The bottom portion of the chart is a relative strength index. Although it remains above the 50 mark, notice that is seems to be losing strength in recent weeks, another indication that a downturn could be on the horizon.
I’m sounding like a broken record, but at this time there is still too much risk in these markets to jump in with both feet. For now the best course of action is to keep most of our assets on the sidelines until there is a clearer indication about which direction the markets and the economy are headed.
F.S.