I’ve always loved music and have tried to work it into my columns every once in a while. After writing an article centered on Passenger’s Let her go last week, I was not looking to do another one so soon.
Still, when I saw the following chart on the State of the Markets blog this morning, the song title just popped into my head.
Source: Bespoke Investment Group
The Dylanesque pop song, Stuck in the Middle With You, that you might remember playing in the background of Quentin Tarantino's 1992 debut film, Reservoir Dogs, kind of sums it up for investors this year, doesn’t it?
The 1972 song, sung by one-hit-wonder Stealers Wheel, really encapsulates the quandary most investors find themselves in today. (Can it really have been that long ago? I was just graduating from the University of Michigan Law School when this one made its appearance on the Billboard charts, ultimately reaching the #6 position!)
As the chart illustrates, we are stuck in the middle of a trading range that stretches all the way back to February of 2015. Throughout this year, stocks have essentially gone nowhere. Last week’s close was just about the same as that on February 21st, except that the latter was a wee bit higher! While that’s better than the over 8% loss experienced this year by the 20-year-plus US Treasury bond, it is certainly nothing to get excited about.
It’s hard to believe but the S&P has crossed back and forth over its key 50-day moving average (an indication of short-term trend direction) 24 times in the last six months. There have never been so many flip flops in any past six-month period in the over 80-year history of the S&P 500! Fortunately, the trend of the market has been slightly higher overall throughout all of these switches.
Source: Bespoke Investment Group
Yes I'm stuck in the middle with you,
And I'm wondering what it is I should do,
It's so hard to keep this smile on my face,
Losing control, yeah, I'm all over the place
A trading range is defined as a period where prices move in a narrow band. This year’s S&P 500 certainly fills the bill as it has traded in a narrow 90-point (4.4%) range since mid-February. The range has been bounded by a low of 2040 on March 11 and an all-time high of 2130 on May 21. Friday’s close was just above the midpoint of the range and its value as I write this, after the markets have absorbed the latest act of this year’s Greek tragedy, was just below the mid-point.
Speaking of the latest drama from the Aegean, it is important to remember that we have been here before and each time we had daily declines of 2-4% on bad news on Greece from which the markets quickly recovered. Remember, too, that Greece is a speck among global economies and has little impact on the US economic picture, in any event.
As I have often written, it is usually the case that markets fall during uncertainty and recover when the crisis abates. With no vote on the Greek referendum scheduled until Sunday, uncertainty and a declining market could easily continue until next Monday, although with positive seasonality from Wednesday on it seems likely some sort of a bounce in response to today’s decline will occur during that period.
It is always possible that this time will be different. If the market takes out the support at the bottom of the trading range (the 2040 level on the S&P), a short-term breakdown could commence that would finally put us at risk of the 10% correction I have been warning of all year.
There is not a lot supporting the market here except the most important indicators, the long-term and intermediate-term trends that are not as yet near turning down. Interest rates continue to trend higher. And market breadth (the direction of most stocks as compared to the market indices) is weaker.
But stuck in the middle are the economic reports that have been directionless—eight better and eight worse than expectations last week. (Although some of the more significant numbers were in the “beat” column.) Similarly on the investor sentiment front, both the number of bears and the number of bulls jumped precipitously last week—so no clear direction there either.
Well I don't know why I came here tonight,
I got the feeling that something ain't right,
I'm so scared in case I fall off my chair,
And I'm wondering how I'll get down the stairs
Earnings season begins in a little more than a week. As analysts have been doing their usual round of downgrades, which often tend to lead to more positive earnings surprises and higher stock prices, these could spark rising values in the stock indexes next week just as the extent of the current crisis is known.
Our time-tested strategies continue mostly positive and the US economy, US-traded companies, and our financial markets are in good shape as we approach another celebration of our nation’s birth.
Beyond that, there is nothing very encouraging to report on in this week’s report. All I can do is supply a little perspective to the dialogue should we experience further declines. And as I watch the play spin out of control on the other side of the Atlantic, I can’t help but hear the song’s refrain repeat in my head:
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you
Enjoy the Fourth!
All the best,
Jerry
http://www.flexibleplan.com/market-hotline/disclosures
