Today the Standard & Poor’s 500 stock index added 0.8%, the Nasdaq Composite climbed to a new all time high, and the Russell 2000 small cap index rose 1.6%.
The action put an end to what I’d call a “market wobble” that had seen the S&P 500 fall in four of the last five trading sessions. Volatility had been rising during that period with the implied volatility in the S&P 500 futures market climbing to plus/minus 30 points for this week from just plus/minus 20 points last week.
But the very solid move today says that “Buy on the Dip” remains in force.
For the moment, at least.
I say “for the moment” because I have to recognize all the positive news that was needed to produce a relatively modest reversal today. We had very positive earnings out of Wal-Mart (WMT) and Cisco Systems (CSCO) that drove those two stocks upward by 9.8% and 1.8% , respectively, today. We had news that pointed to a greater likelihood for passage of the Republican tax cuts as Ron Johnson, Republican Senator from Wisconsin, backed off on his opposition to the bill announced yesterday. We had a cash infusion by the Chinese central bank that supported global commodity prices. And we had a solid 1.5% rally in Japan’s Nikkei 225 index to prime the pump for the U.S. market open.
The pattern in most years is for markets to rise from late November through the end of the year on end of the year infusions of cash into pension plans and retirement accounts. Typically, also, money from professional portfolios chases momentum winners as active managers try to make sure they don’t fall too far behind the passive index ETFs.
On the evidence of the week-long wobble and today’s buy on the dip reaction, I’d say that upward trend will be in force this year unless news disrupts market confidence. There certainly are potential news items that could disrupt the trend. The tax bill could fail. The government could be thrown into chaos by a failure to pass some kind of funding bill by the December 8 expiration of the current measure, or worries about the approach of the debt ceiling–again–might be more unnerving this time than they’ve been in the past.
What this all means, in my opinion, is that while certainly the market isn’t without risk at this moment–some of those negative news items (and others) do stand a good chance of materializing–the underlying trend through the end of the year is still upward.
January, after those end of the year cash flows have been put to work, is another matter.
