ETF Periscope: Confidence Gain or Confidence Game?

 

“I never blame myself when I’m not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn’t my fault that I’m not hitting, how can I get mad at myself?”   –  Yogi Berra

 

Wall Street’s nihilistic love affair with its current schizophrenic nature continues with yet another week of up-and-down moves of 1 – 2% on a regular basis.

What appears to be going on is a seesaw battle between investors who are hell-bent on picking up stocks at relatively attractive prices, and traders and high-frequency institutional players that react to the EU drama-of-the-day with itchy trigger fingers.

Last week was somewhat of a case study of the sideways nature of the recent market. In spite of a nearly 400-point drop in the Dow Jones Industrial Average (DJIA) on Wednesday, two out of three of the major averages finished the week in the black.

The Dow ended the week 1.4% higher, reversing last week’s downtrend. Meanwhile, the S&P 500 Index (SPX) gained 0.9%, while the Nasdaq Composite Index (COMP) lost ground to the tune of 0.3%.

For the year to date, all three of the major averages remain in the black, though in the case of SPX, just barely, coming in at plus 0.5% on the year. Nasdaq has fared slightly better, at 1%, while the Dow has performed the strongest, in the black by 5% as of last Friday.

Worth noting is the fact that average daily volume on the New York Stock Exchange was off by 25% in comparison to the previous month’s average. It is not unlikely that many retail investors, whipsawed by an absurdly volatile market, have exited to the sidelines to recover from a bad case of stock-induced vertigo. There have been, as well, a number of hedge funds that have been caught in the high volatility blender, and some of them have pulled back, sitting on cash and licking their wounds.

The reality remains that the equity market is likely to continue trading more like the commodity market for the foreseeable future, or at least until there’s a perceptual shift away from the market as being a bipolar rollercoaster.

That shift may have begun, at least as far as consumers are concerned, based on last week’s Reuter’s/University of Michigan’s consumer sentiment index. The latest reading jumped to the highest levels in five months, reflecting a rise in consumer spending and, apparently, in consumer confidence in the economy.

The flip side of the domestic economic picture may be viewed through the lens of unemployment, which remains at a sticky 9%, a substantial number in our consumer-driven economy. Even this number, however, may not tell the real story, primarily because it doesn’t reflect the number of either the underemployed or those who have simply given up looking for that elusive job.

In addition, with unemployment benefits running out for a growing segment of those who are out of work, a certain percentage of the newly “no-more-benefits” crowd aren’t really represented in the government data. The likely result is that we are now becoming acceptant of that 9% number as the new normal, even as it becomes a less and less accurate barometer of the country’s job crisis.

Technically speaking, the Blue-Chip Index appears to be at a rather interesting junction. If you take a look at the Dow’s chart, you’ll notice that it has been wrestling with its own 200-Day moving average, finding itself both below and above it with equal frequency for the past several weeks.

This is rather unusual, at least in terms of recent history, as the MA tends to serve either as a barrier or a support level once it is approached or breached. In the current case, the large daily moves in the 200- and 300-point range are creating a rather unusual pattern. It might be seen as a “consolidation on steroids,” and either an extreme breakthrough or breakdown wouldn’t be a surprise in the near future.

Whether the trend emerges in the direction of the short or long side, however, depends on whether a consensus confluence of events, in the form of the EU debt crisis and the US economic picture, will occur.

There is a changing of the guard in leadership Italy and Greece, two of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), which may or may not tend to accomplish anything other than mollify investor concerns for the moment.

As for the U.S. economy, last week’s consumer survey indicates there is a rising degree of confidence in the direction it is heading.

If this perceptual shift carries through the holidays, translating into consumers consuming, and the EU stays at least short-term calm, Wall Street could find some Bullish wind filling its sails.

Without that confluence, however, the nervous market might finally have a nervous breakdown, revisiting and perhaps exceeding the lows on the year.

ETF Periscope

 

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings, stock, or index selections provided by ETF Periscope/Sabrient. ETF Periscope/Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.