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The Bull Days of Summer


Readers know I’ve been increasing cash for the last few months, expecting possibly severe turbulence the rest of the year.  But, the market has been drifting upwards over the last six weeks.  Does that mean the bull has returned?  In a word . . . No!

I would be more likely to believe the bull had returned if trading volumes had increased.  That would suggest investors are returning to the market, but this is not the case.  The dog days of summer normally see little action, and this is no exception.  However, trading volumes are even low for the summertime, running about 40% below normal.  The retail investor is definitely staying out of the market.

In addition, a bull market is traditionally “confirmed” when the Dow Transportation Index also rises, which has not been the case this summer.  The theory is that the market will be rising if the economy is doing better, and we’ll know that when trucks and trains are carrying more goods, which makes the Transportation Index rise.  Without that confirmation, the bull rally only looks temporary.

My perspective is that the U.S. stock market has been a one-trick pony all year, reacting only to news out of Europe, who is on “holiday” right now, thank goodness!  Once European politicians get back to their usual work of  accomplishing very little, I expect we’ll get whip-sawed again.  (I was worried the crisis would erupt again on August 20th, if Greece didn’t make their bond payments due that day, but it appears they have now raised enough money to postpone the crisis until September.)

During the fall season, the conventional wisdom is that the market will start rising when it believes Romney will win, but I expect the market will not start rising until it believes gridlock will end, i.e., if the Senate also goes Republican, which won’t be known until the election itself.  We’ll see. . .

In the meantime, just enjoy the warm afterglow of a bull during the dog days of summer.  Better yet, join the Europeans and go on vacation yourself!

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