HO HUM

The markets continued their meandering ways today with the S&P barely moving above the flat line.  Over the last 6 trading days the S&P is up .3% with extremely low volatility.  With options expiring Friday and more earnings after the bell today, volatility could pick up.  Volume has been anemic, which is typical of this time of year, which can make for sudden moves either way.  Certainly volatility will pick up significantly with the Fed's meeting at the end of this month and the European Central Bank's meeting in early September.  It is no secret that the market is betting on either Bernanke (Fed) or Draghi (ECB) coming to the rescue in the next month.  A disappointment from either could start a significant sell-off as the market doesn't like surprises and at least some of the potential accommodative policies have been baked into stock prices.  Bernanke is in a bit of a hard place.  He knows that Wall Street is largely expecting him to act in two weeks but while the economy is struggling it is showing slow improvement.  Additionally, with a 1.5% economic growth rate the market is already ahead of itself by many measures and any Fed easing would only serve to further the over-reach.  Finally, Bernanke has made a point to try and separate politics from his job function and the closer we get to the election the more it looks like any move is politically motivated (whether true or not).  Draghi has his own challenges in trying to pull together consensus from all of the Euro Zone members and getting Germany to sign off on any new plan.  All in all, risk remains high in our way of thinking. 

There are currently a number of conflicting signals.  Bond yields have gone up significantly in the last week (indicating money coming out of bonds) and yet stock prices have remained relatively flat.  Generally, rising bond yields (especially from the low levels of today) would indicate a major shift from bonds to equities but we are not seeing a commensurate rise in equities one would expect from such a large move in yields.  Something will have to give soon - either stocks will rise in conjunction with yields or yields will turn down again and stock prices will follow.  The Vix is also a little confounding here.  The Vix measures the volatility in the market and a low Vix usually indicates higher prices while a higher Vix usually indicates higher risk and lower prices.  Currently the Vix is very low by historical standards and reflects a measure of complacency and/or expectation of still higher prices.  This may be a reflection of the market's expectation of Fed action that puts a floor on just how low this market could potentially go.  In any event, the declining Vix is not consistent with the stock market action of the last week or two.  This market is acting very strange which causes us to take note and wonder what is going on behind the scenes.  We have many more thoughts but this post is already longer than usual.  We will have more to say in our next newsletter and, hopefully, a little more information to sift through.