Expect The Unexpected In This Low Volume Market

And this too shall pass; with extremely light participation, severely depressed volume and random price movement, the actions of a few impact the many.

Performance anxiety is causing managers to chase prices, regardless of fundamental reasons or inherent value. As long as the overwhelming urge to chase higher prices exists, buyers will be more aggressive (desperate?) than sellers.

There are 2 long weeks until the Labor Day holiday weekend, meaning no new policy decisions will made for a while, as junior staff holds down the fort while senior executives enjoy the final days of summer vacation and the Fed is off riding those happy trails in Jackson Hole.

Some trails are happy ones,
Others are blue.
It’s the way you ride the trail that counts,
Here’s a happy one for you.

Happy trails to you,
Until we meet again.
Happy trails to you,
Keep smilin’ until then.

Who cares about the clouds when we’ere together?
Just sing a song, and bring the sunny weather.

Happy trails to you,
Til we meet again.

Ah, Roy and Dale. I guess this week, Ben gets to play Roy.

Climbing the proverbial wall of worry usually means buyers are reluctant to act near bottoms, while being shaken out as the rally progresses. Normal bull markets initially impulse higher (inhale), then correct (exhale) some of their gains, as traders anticipate the old bear trend to resurface. The pullback must cause enough fear in stock owners to force them to liquidate their holdings.

To our eyes, however, nothing could be further from the truth as buyers have had a free ride all the way up to current prices; going sideways or gently retreating not only doesn’t strike fear in the hearts of equity holders, it actually empowers them to be more aggressive, confident the trend is their friend, the wind at their back.

The lack of natural ebb and flow to prices creates an unstable situation, a runaway market. These conditions of course can run longer than anyone can imagine, hence the adage that the market can stay irrational longer than nonbelievers can stay solvent. When it stops nobody knows, but forewarned is to be prepared.

Gold (GLD -0.24%) is beginning to look a bit interesting, as money is slowly flowing into the precious metals and miners even as their prices have been receding. Indeed the daily RSI readings are signaling the sector is moderately oversold (Buy Alerts in Goldcorp, Kinross and Yamana on 8/18), as longer term price patterns still have the potential to skyrocket higher. We have assumed miners would be the last players off the dance floor and that could still turn out to be the case, just not in the manner we envisioned.

Although it seems the latest rally has accomplished with smoke and mirrors, the Bears have been unable to seize the moment. We have preached patience for many weeks (months?) but even the pros are getting antsy. Eventually the daily ranges will expand, volume will return to the market, and stock prices will dynamically trend.

Expect the unexpected; don’t be surprised if the S&P makes a run at the highs of last week, as we are almost there. If it occurs, though, any subsequent decline below this week’s low will spell trouble for the market.

Have a great day.

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Comment by Nicky D

2009-08-21 08:14:54

Thanks for telling us nothing. We have enough hot air in these dogs days of summer.

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