In What direction Will the Stock Market Go?


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The dog days of summer have hit Wall Street.

Next-to nothing has happened to the S&P 500 over the past five sessions. And even less has transpired over on the Dow Jones Industrial Average as the venerable index finished yesterday a grand total of 4 points higher than where it closed on August 7th. What about the NASDAQ you ask? While the stocks in four-letterland did make a run for the border yesterday, the composite index is only a point higher than where it closed six sessions ago.

There are a couple of ways to look at the sideways action that has occurred recently. The bulls contend that we're seeing a nice, quiet period of sideways consolidation. Our heroes in horns contend that the trend is still up and that the market has "handled" everything the bears have been able to throw at it lately. Oh, and hope for a little thing called QE on both sides of the Atlantic has been cited as a reason for the market's levitation act.

It probably won't surprise you that those seeing the glass as at least half-empty do not concur. In fact, our furry friends in the bear camp continue to warn that this is 2007 all over again and that as soon as Angela Merkel starts saying "nein" with regularity again, the stock market will begin another scary dance to the downside.

To be sure, I don't have a crystal ball. However, I can say that over the past year, we have seen two distinctly different types of trends. And my guess is that one of them is going to resume at some point in the near future.

If you will recall, it was a year ago August that the market plunged something on the order of 20% in less than three weeks (the vast majority of the damage occurred in 9 days). And for the next four months, the stock market was a roller coaster ride, moving one direction in a straight line for several days only to quickly reverse course and retrace the majority of the move in an equally short period of time. But then beginning in mid-December, the game changed and the volatility receded. And for next three and a half months, the market marched steadily higher with nary a single bout of volatility along the way.

Periods of sideways consolidation occurred several times during the one-way markets seen during the December-March period as well as the QE2 rally in 2010. Each time an uber-boring period set in it was eventually resolved with another blast higher. So, given that the current move started with a blast up and was subsequently followed by a 5-6 day period of market malaise, I'm wondering if we couldn't be embarking on another meaningful one-way move to the upside.

While a violent algo-charged reaction to any headline, comment or rumor will answer this question, I for one will be on the lookout for clues as to which type of trend is going to resume. Will it be the violent, HFT-driven, roller coaster ride in reaction to some news or a resumption of the type of hope-based one-way market we saw in 2010 and again last winter? I guess time will tell.

Positions in stocks mentioned: SPY

Follow Mr. Moenning on Twitter: @StateDave (Twitter is the new ticker tape)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , US Markets , Futures , Stocks
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