The next two weeks are shaping up as a critical test for the U.S. stock market.
Last week a number of key technical indicators stalled in the last few days if they’re waiting for something. Today, October 25, started out with a bang but the markets have pulled off their highs as of 12:30. The reaction to this morning’s good news on housing seems relatively restrained so far.
I think that something is probably the Federal Reserve’s meeting on November 2-3. Wall Street wants to know more from Chairman Ben Bernanke on the size and timing of any new program of quantitative easing before moving higher. If the market is disappointed in what it hears on November 3 from the Fed’s Open Market Committee, I think we could get a correction that retraces part of this rally.
Take a look at the Dow Jones Industrial Average to see what I mean. At the close October 22 at 11133, the index traded within 90 points of its April 26 high at 11205. Since moving above 11000, the index has stalled with high trading volume, Arthur Hill pointed out in his market message on StockCharts.com on October 22. High volumes often occur at inflection points in the market. For example, the April high came on a high–volume spike and the reversals in May, June, and July came on high volumes. A stall here is fine, Hill notes, as long as it gets resolved to the upside. A break below 10900 on the Dow would be a sign to watch out for the start of a correction.
The markets aren’t looking for a concrete announcement on November 3 of another wave of Treasury buying by the Federal Reserve. But Wall Street would certainly be disappointed by a Fed announcement that backed away from another round of quantitative easing and is quite possibly is counting on some change in the Fed’s language that indicates that quantitative easing is nearer.
The Fed’s decision is a big deal for stocks. This rally, especially in the last couple of weeks, has been fueled by the belief that the Fed will put hundreds of billions (maybe as much as $1 trillion although maybe not all at once) in cash into the hands of investors and traders by buying Treasuries at a time when interest rates are so low that the stock market looks like the best game in town.
It’s only logical to expect that investors would take a pause here to see if that expectation is correct.
By the way, just so we’re perfectly clear, I’m still expecting a fourth quarter rally. My only question is whether we get it after a short correction or as a continuation of the current rally.
Jim… I don’t know if this piece previously appeared in The Atlantic or not. Even though this shift has been going on for a while, it is only now starting to attract “media” attention. As far as investment in transportation, this shift from all Highway all the time, to transportation choice is partly what is holding up re-authorization of the “highway bill” in congress. That plus the fact that our intake from gas tax does not cover the spending on highways and will worsen as we make vehicles more fuel efficient. Look for a push for a mileage tax or some other way to replenish broke the highway “trust fund”.
I think the overall trend though of a greater % of the population wanting more choice (not that everyone must live in a dense “urban” development) does have investment implications. Ranging from who is going to buy the existing exurban or suburban starter castles from Boomers (not me) when they want to “cash out” to the long term prospects of housing companies that are too focused on only low density SFR development (I would stay away short and long term, unless they move with the consumer shift). This also has implications for car companies (less car ownership) and tech (more spending on tech since there is only 1 or no cars to pay for). Other beneficiaries could be companies that make light rail components or construction or material supply companies. As an aside, I just got back from Denver and saw their light rail construction project that is reaching out to their SW suburbs. This most likely will spur dense development around those rail stations (transit oriented development) and will be popular for those that can’t afford to live in LoDo but want a similar experience.
Am I misteken of didn’t I see a very similar piece in The Atlantic not too long ago. I thought that the basic problem with this argument is that it doesn’t look at the (subidized) inbvestment required to create the landscape as it is. I’d think that without a comparable investment in creating an alternative what we’ll see is just a gradual decay of the current situation rather than the creation of that alternative. A great example is Doug Christie’s decision to kill a second NJ/NY train tunnel despite the currenbt single tunnel runnng at full capacity so that he can put the money into more highways and highway repair (without raising the gas tax in NJ.)
Off Topic: The Next Housing Boom (But it may not be where you think): http://www.washingtonmonthly.com/features/2010/1011.doherty-leinberger.html
As an urban planner, I will say that this is not really new, but there are many things converging that could lead to compact and walkable neighborhoods where a car is not required or not needed for every trip. Demographics and the cost of fuel are prime drivers.