HOLDING OUR BREATH

In the month since the panic lows set in early August, the equity market is almost exactly where it started, near SPX 1140. In fact, this area has been visited no less than 5 times in the past month, but each time it is touched the major indices have rallied between 60 and 90 points in a few days. Let me repeat, we have bounced near the SPX 1140 area and rallied 60 to 90 points quickly five times in the past month, yet we are back to where we started. We’ve travelled about 600 points or over 50% of the current index value, yet have gone nowhere.

During this time we have had a litany of negative headlines and continuing headline risk. Lets face it, the news ain’t so good on almost every front and I certainly don’t need to recite them here. But we continue to hold at the very top (initial support) of last year’s summer trading range (1040-1140) before QE2 was announced. It didn’t actually begin until November, but was officially announced just before the Labor Day break and the market responded immediately, rallying almost 200 points, to 1225, before any bond buying was initiated.

I became cautious shortly after the November official beginning near SPX 1250 and downright bearish after that. You could say that I missed a nice, quick 100 SPX upside points. But my attitude was that the QE induced “buy the dip” mentality would be penalized with prejudice. During the final six months of QE2, the major indices traded in a 100 SPX point range and underwent classic Distribution. As it turned out, short term traders enjoyed the upside, but investors were wise to heed my warnings as  THE GAINS WERE NOT SUSTAINABLE and have almost all been given back AND MORE.

Forget about the news for a second. Is there a “Wall of Worry”. Of course there is. The problem is that the market had been climbing it for over two years without fundamental resolution. But forget about fundamentals. Let’s just “look at the market”. There has been a quick 200 point SPX pullback from the yearly highs. There has been a high degree of technical damage in the broad base of stocks. There is tremendous instability from day to day in stocks. There is significant resistance just overhead in stocks. There has been a “maybe” for more free money from the Federal Reserve. Throughout those statements of fact, only the “free money” comment is what most investors are focused on because it “saved” the market last year from the EXACT SAME FATE that we are faced with now.

Every day we are welcomed to another European or domestic crisis. Yet the major indices have not broken. They have not done so because they are waiting to see if Uncle Ben will give us another Trillion Dollars to play with on September 21. If he does, it is all good for the equity markets and we’ll gain and keep the 100 points that have not stuck. If he doesn’t, we lose the next 100 SPX points to test of lows of last summer, pre-QE2 at SPX 1040.

In the meantime, the lights are on but nobody’s home.