It’s been quite a roller coaster ride on Wall Street lately. Since the dog days of July (7/24/14 to be exact) the S&P 500 has been on a wild ride. In a period of just a little more than three months, the venerable stock market index has experienced a pullback of -4.35 percent, a rally of +5.74 percent, a scary decline of -9.84 percent, and a stampede to the upside which totaled +11.2 percent (so far) from the intraday low of October 15.
And as the chart below illustrates, with the exception of a couple weeks in early September, all the moves have been one-way affairs. In other words, stocks have been either moving straight up or straight down for the better part of three-plus months now.
S&P 500 – Daily
So, after blasting higher over the past three weeks, it is safe to say that the stock market finds itself overbought and the bulls in need of a rest. In short, what investors have seen over the past two days is just that; a rest, a pause (that refreshes?), the start of a pullback, or what we like to call a sloppy period.
Although the bears have not been able to get anything to speak of going to the downside (yet?), this isn’t to say they haven’t tried. And on Tuesday, our furry friends actually had something to work with.
Cue The Next Crisis?
The day started out well enough. The bulls got some good news as St. Louis Fed President James Bullard, flip-flopped his position on the state of the economy, saying that there is “no need for more QE for now, the economy is in good shape.” This after saying 14 days ago that the Fed should consider delaying the end of QEIII.
Then something came out of the blue (as it usually does these days) to cause traders to begin to worry, to fret, and perhaps to fear that the next crisis may be upon us. But in this case, it is really just a return of an old crisis – the European debt debacle.
Citing sources inside the ECB, Reuters reported that central bankers plan to challenge ECB President Draghi over his secretive management style and erratic communications. The story implied the Draghi had gone rogue in Jackson Hole and had gone against the plan the ECB Board of Governors had agreed upon.
Reuters suggested further that as the ECB has moved into more unconventional territory with regard to policy considerations, Draghi has acted increasingly on his own or with only the counsel of a few aides. In other words, the report indicated that Draghi may be challenged at the next ECB meeting.
Why Should We Worry About Draghi?
In short, the key thing to understand is the stock market HATES uncertainty. And if the ECB governors aren’t all rowing in the same direction – especially on the topic of QE – then a lot of uncertainty could creep into the mix VERY fast.
Remember, one of the key reasons behind the recent joyride to the upside in stocks is the fact that first Japan announced a big bump in its QE program and then, at some point in the future, it is assumed that the ECB will be joining in the QE game and printing new money that would need to find a home. And given that the ECB isn’t known for swift action to begin with, the fact that there could be infighting (or worse) at the ECB could certainly create uncertainty about the very launch of a QE initiative.
Then there is the state of the Eurozone economy. Just yesterday morning the European Commission had downgraded their forecast for economic growth in 2014 and 2015 with several projections getting uncomfortably close to the zero-line.
The point here is that if the ECB is no longer united in their stance toward aiding the economies of Europe, then the economic future of the Euro area is clearly uncertain. And if the likes of France, Germany, etc. start dipping back into recession, it is a safe bet that the debt crisis would once again rear its ugly head.
So, while the Dow actually closed up on the day and the S&P 500 pulled back only 6 points, the key takeaway from Tuesday’s action is the idea that some uncertainty could possibly be creeping in. And as such, investors may want to keep an eye on Europe (yes, again) for a while.
– See more at: StateoftheMarkets.com
David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.