Unlike the herky jerky move off the June lows where 3-7 days of gains would immediately be followed by 3-7 days of losses taking back 50-66% of the previous move up, the tone has changed substantially in August. After a "gap and go" day Friday August 3rd as market participant's "read between the lines" of Draghi's press conference comments, the market has consolidated that day's move with sideways action. This is much more like the performance in January-March of this year. Recall upside moves can be "unhealthy" just as downside moves can be – when the action is violent as it was in April-July – it marks indecision and the random moves do not signify health. Also almost all the gains in some time frames come on news and overnight gaps, which is not exactly healthy either. A low volatility environment is far more constructive, even when there are moves down within that atmosphere.
So along with the low volatility there has been a rotation into pro cyclical areas – semiconductors, commodities, and industrials. What was missing was transports but those finally woke up mid week.
The NASDAQ and small caps are also showing some rotational strength – these are more 'risk on' markets than the S&P 500.
Further, bonds have sold off which was NOT the situation during the June/July portion of the rally (the herky jerky part). While an ETF like TLT is due for an oversold bounce, what happens to equity markets when that bounce happens is key #1, and how quickly that bounce is reversed (if it is reversed) will be key #2.
Volume has been extremely poor during August, but volume has seemed to no longer matter in the post 2007 era. Almost all major rallies have come on whiffs of volume… volume only picks up during selloffs. In the old days you wanted volume to confirm a rally but these are no longer the old days.
Now I will remind we have a multitude of gaps to fill in the S&P 500 chart (I am using SPY ETF since it shows them better). Usually index gaps fill in a 2-4 month time frame.
Aside from the breakaway gap in early June which might not fill for some time, there are a series created in July and early August, mostly from Draghi jawboning of markets. What causes them to fill will be the interesting piece of the puzzle in the weeks/months ahead. It is hard to see Bernanke coming to the market with "emergency QE" at yearly highs (?) but I guess anything is possible. But a correction down to the lower end of this ascending channel created since June would fill two of the three major outstanding gaps – however, until the lows created over the past 2 weeks are breached it's not a subject at the forefront, just something to be aware of.
Frankly the economic situation is not very good globally, and corporate profits are under pressure – these are not usually scenarios where markets run but in this era of conditioning to central bankers action (bad news is good news) things act differently. So until price action changes, one has to march to the the band leaders. Put another way "hear no evil, see no evil" investing.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog