Low Volume Misleading Investors
Surveying market action over the past several weeks, everything looks calm on the surface; but underneath, a storm is brewing.
This summer markets haven't moved much, with the Dow Jones Industrial still exactly where it was in early May. The last month has been especially dull, with stocks often moving a percent or less each day. There simply hasn't been any volatility to speak of.
As pleasant as this sounds, things are about to change - the smooth ride will be coming to an end in the very near future.
In the investment world there is a saying to "sell in May and go away." This little ditty refers to the typically slow summer months on trading floors that result from most traders - and investors - taking time off with their families. Many on Wall Street use this time to get out of the city, often preferring the slower pace of the Hamptons.
What we've witnessed over the last several weeks - the stability in the markets - has been the result of depressed trading volume. But it won't last. As these words are penned traders are rolling up their beach towels, sending their kids back to school, and gearing back up for a busy fall.
This is not unusual. After volume drops off in May it usually picks back up after Labor Day. This occurs for several reasons aside from the fact that people are shifting gears after their summer vacations.
As Isaac has recently reminded us, fall is also hurricane season in the US. Winter weather can have serious impacts on everything from oil transportation to tourism, commodity prices to consumer confidence.
Plus - in case anyone forgot - this happens to be an election year, meaning that this fall will be even more volatile than normal. While volatility will pick up, the market will also resume some overall trend other than sideways, which it has been for several weeks.
Last week we wrote that we believe the 2012 presidential election is a foregone conclusion, even with a third-party candidate on the ballot. There was also a third-party candidate in the 1980, but Ronald Reagan won so decisively that not many people even remember his name.
But whether this election has already been decided, markets will nevertheless react to each and every political headline. Every new poll, every proposed policy from either candidate, and every whisper about Fed Chairman Ben Bernanke's job security is going to make a splash. All investors can do now is get ready for the ride.