As we headed into Labor Day, stocks could muster little
enthusiasm. A creeping sense that the
was slowing led to fresh concerns of the dreaded "double-dip"
The Federal Reserve was also seeing signs of a slowdown. As a
began to speak of a tool in its arsenal to help jolt the economy to
life. That tool, known as Quantitative Easing (QE), changed the
entire perception of the stock market. Investors came to see that
the Fed's move had a real chance of getting the economic ball
rolling, which was enough to fuel a heady rally in September that
has continued into October. The Dow Jones Industrial Average now
sits near its 52-week high.
But it's fair to wonder if this steady gain has already accounted
for benefits that may be derived from the Fed's much-discussed QE
plans. And it's also fair to mistrust these kinds of rallies. The
Dow surged more than +10% last February and March only to give back
all those gains -- and more -- in the next few months. Here are
four signs to watch that may signal a time for profit-taking.
1. The reaction to news.
is getting going and investors need to clearly monitor how stocks
trade on strong or weak results.
has tacked on steady gains since reporting solid results last week.
Intel's (Nasdaq: INTC)
solid quarterly report is being met with a shrug on Wednesday, and
investors are pushing the stock into the red after a positive open.
That means investors were seeing the cup as half full for Alcoa,
but half empty for Intel a week later. If shares prices fail to
rally in the face of good news, that's a sign investors are looking
for excuses to take profits. You'll have to track
reactions almost every day this month -- as sentiment can turn at
2. Trading volume slumps.
If a rally is accompanied by rising stock market volume, then
investors are becoming increasingly bullish. Yet success begets
success, and markets can still power higher even as enthusiasm
starts to wane. It pays to watch the S&P 500's daily trading
volume for signs of fatigue. Daily trading volume appears to have
peaked at around 4.5 billion shares in mid-September, and after a
lull, spiked back up to 4.2 billion shares at the end of the month.
We haven't seen those levels since, and if daily trading volume
slumps back to the 3.5 billion mark as we wind through earnings
season, that would be a bearish sign.
3. Fund inflow.
The Investment Company Institute (
) tracks the amount of money flowing into equity mutual funds on a
weekly basis. And since the value of stocks is simply a function of
supply and demand, then it figures that the amount of money going
into funds affects the direction of the market. A
manager can opt to keep some of that money in the form of cash, but
for the most part, funds need to be put to work to keep up with
In that context, the
ICI's recent readings
are awfully curious.
Throughout September, individual investors had been taking money
out equity funds, which historically speaking, has pushed averages
down. This is a clear negative for the market, and may still come
home to roost. Then again, I recently opined that individual
investors would be heartened by the recent rally and re-enter the
market in force. [See "
10 Bold Predictions for the Next 12 Months
Let's hope that individual investors don't pour in just as the
market peters out. Individual investors have a lousy track record
in terms of
, and they've already been burned too many times.
4. Reaction to "Buy on the rumor sell on the
As noted above, the Fed's QE program has not yet gotten underway.
Some suspect that recent gains already anticipate any benefits and
predict that investors will head to the exits once the QE program
is actually put into action. If the market fails to rally on such
an announcement, that's a sure sign that this rally is out of
breath and the next move may be to take profits or even go short.
Action to Take -->
This is an awfully tricky time. The market has staged an impressive
rally, volatility-inducing earnings season is upon us, economic
data points still reflect sluggishness, and last-minute mid-term
election campaigning could still throw a monkey wrench into the
tenor of the market's mood. So it's no time for complacency, unless
you view your investments as long-term holdings. Be prepared to
lock in gains if these warning signs emerge.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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