Market Talk

All anyone could talk about a month ago was the looming stock-market pullback in September. Turns out the exact opposite has come to fruition.

Analysts kept preaching how September was typically the market’s worst month of the year. But amid the gloom and doom, stocks have had the inverse reaction and raced higher this month, with the S&P 500 up about 8%, its best September performance since 1939.

But there are still six sessions remaining this month, so for all those bears still waiting for the September swoon, there’s some hope.

September’s strong performance to this point doesn’t necessarily mean it will close the month on an even higher note. Bespoke Investment Group posts the S&P 500′s 10 best September performances through Sept. 22, but notes that the index during those specific months has averaged a 1.2% decline for the remainder of September. The S&P 500 has posted positive returns for the rest of the month in only three out of the nine previous instances (not including 2010.)

Based on that data, the quick run-up this month may hit a speed bump, which is what happened today. Stocks closed slightly lower, with the Dow snapping its five-day winning streak, as the Fed’s deepening worries over deflation prompted a flight to safety. Gold hit another fresh high, while the dollar fell.

Whether this flight to safety marks the beginning of a new trend remains to be seen. But the fact that the Fed is still considering quantitative-easing measures doesn’t exactly bode well for the overall health of the economy.

That’s a big worry that shouldn’t sit well with equity investors.

Don't you dare doubt the market.

For investors, this month has been anything but a typical September.

This month kicked off with the usual banter that September is historically the worst month for market. But ten days later the market hasn’t followed any of September’s historic patterns. Stocks keep drifting higher and, as a result, the bulls are starting to show fresh signs of life.

The S&P 500′s 5.2% rise in the first six trading days of the month is the best six-day start to September since 1939, Bespoke reports. Bullish sentiment among individual investors has soared throughout the last two weeks and most recently reached its highest level since April, according to AAII’s sentiment survey.

“Talk about a schizophrenic market,” Pragmatic Capitalism says. “Just two weeks ago the sky was falling…Now, just a few economic reports and a brief rally later, small investors are convinced that there are no risks coming down the pike.”

But the rallying stock market and soaring investor sentiment begs the question: What exactly has changed in the last few weeks?

Sure, we’ve had a run of not-exactly-horrible economic data over that time frame. But the better-than-expected ISM manufacturing report and jobs data, which garnered the most attention last week, weren’t exactly excellent reports. Lets not kid ourselves, data improving from awful to less awful shouldn’t be a reason to believe the economy’s back and the recovery’s ready to roar.

Couple of other things to consider as this rally keeps puttering along: this recent run-up has all been on low volume, which tends to skew results and lack conviction in either direction. As Pragmatic Capitalism notes, the last time bullish sentiment was this high was mid-April, just days before the 1Q market peak.

We’ll end with UBS’ Art Cashin’s wise conclusion to his morning note: “Thin markets are very tricky. Stay very nimble.”

Stocks stage a modest rally as S&P 500 hovers around 11o0 yet again before closing at 1099. But the longer the index keeps lingering around that level, the more restless strategists are becoming.

The index crossed under 1100 in May and has essentially traded sideways since then and hasn’t shown any signs of breaking out of the trading range its been stuck in for months. And with 2010 about 3/4 over, a bunch of strategists have cut their year-end S&P 500 price targets.

Bespoke Investment Group cites Bloomberg’s weekly survey which shows strategists’ average target has dropped to 1205, about 20 points lower than the beginning of year. And five of 12 strategists surveyed have also lowered targets after boosting them earlier in 2010.

JPMorgan’s Thomas Lee and BofA’s David Bianco continue believing S&P 500 will end the year at 1300 by year’s end, while Deutche Bank’s Blinky Chadha is even more bullish, holding a 1375 target, which would represent a 25% jump from current levels.

S&P 500 at 1205 by year’s end would mark 10% gains from where it currently stands. Even that would be quite the run-up over the last quarter of the year, but maybe it’s not so far-fetched.

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Hit up the beach while you can.

The stock market’s historical performance in the week before Labor Day hasn’t been too favorable. And Monday’s action is holding true to that pattern.

Stocks kicking off the week on a sour note, with the Dow recently down 100 at 10052, slashing more than half of Friday’s 165-point gain. The big rally at the end of last week came on the heels of a better-than-expected (although still bad) GDP report. But a lack of conviction behind the rally has failed to produce a follow-through today, with stocks falling as investors search for clarity regarding the macroeconomic picture.

There was a bit of decent news on the economic front this morning: personal income and spending rose last month. But in the broader context, investors concluded one month of small gains isn’t enough to change their mindsets regarding the overall trend seen throughout the last year, James Picerno notes at The Capital Spectator.

“The future for the macroeconomic mystery still depends heavily on the labor front and wages,” he says. The good news is wages are rising, but “the economy’s still not adding workers at anything close to a robust pace,” Picerno adds. “Only the combination of rising employment and rising wages will deliver an end to the challenges that bedevil the business cycle.”

Unfortunately, it doesn’t look like that combination will come to fruition anytime soon. The monthly jobs report is due Friday, with economists surveyed by Dow Jones Newswires expecting a 123,000 drop in August payrolls and the unemployment rate to tick up to 9.6%.

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From one extreme to the other, it’s pretty amazing to see the stock market’s movement throughout the last few weeks.

Stocks are rallying sharply on Tuesday and poised to extend their current five-day winning streak as better-than-expected quarterly results from Alcoa and CSX are boosting optimism for 2Q earnings season (although the stocks themselves aren’t getting much of a boost.) But amid all the euphoria, keep in mind the current winning streak actually comes on the heels of a deeper losing streak.

The S&P 500 dropped for five straight sessions and nine out of 10 overall prior to the current winning streak, losing 8.5% overall in that time frame. By contrast, if the index were to close at current levels today (up 14 at 1093), it would be up 6.7% on this six-day winning streak, meaning it still has ground to make up from the most recent losing streak.

The wild swings over such a relatively short period of team are pretty rare. A five-day losing streak followed by a five-day winning streak has only happened 21 times in the previous 50 years, last occurring in May 2001, Bespoke Investment Group points out. And prior to that, it hadn’t happened since 1993.

“Volume has been anemic during this rise, with little individual participation,” says Michael Shedlock, an investment adviser for Sitka Pacific Capital. “So did ‘herding’ take over or did black-box futures and flash-trading take over? I do not consider this a good omen for equities.”

The Dow was recently up 154 at 10370, with the next key resistance area between 10400-10450, which includes the 200-day moving average and 50% retracement of late-April to early-July correction.

With some technical indicators, including momentum and the relative strength index, starting to level out, however, the Dow doesn’t appear to have enough steam to reach that level without first some consolidation.

(Tomi Kilgore contributed to this post.)

Hmmm. Yes, maybe I should do the opposite.

Bearish sentiment among advisers and individual investors is on the rise, according to weekly newsletter surveys, as combined bearish sentiment among the II and AAII surveys is at the highest level since the beginning of November, according to Bespoke Investment Group.

Market participants are turning more negative as the stock market preps to cap one of its toughest months in recent memory. The S&P was down 10% in May before today’s big 3.3% rally. And if history is any indicator, spikes in bearish sentiment are often viewed as contrarian indicators.

“Since the market bottomed back in 2009, spikes in bearish sentiment have actually turned out to be pretty good buying opportunities,” BIG says.

As Barry Ritholtz notes, 10% monthly declines are pretty rare. But when they do happen, they’re typically followed by snap-back rallies. The last 10% monthly decline on the S&P 500 was February 2009. But the index rose 8.5% in the following month. And what happened next is well documented - a strong March 2009 performance became a springboard for what turned into a sharp 75% rally over a 14-month time frame.

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Worries about the euro have been reverberating through the market as US stocks have been sharply lower for much of the session. In the last hour, stocks came barreling back, with the Dow inching closer to positive territory, only to fall back, highlighting how volatile the markets have truly become throughout the last few weeks.

The Dow was recently off 71, but fell as much as 184 in earlier trading. Prior to today’s session, the index has had 11 triple-digit moves in the past 14 sessions, as wild swings are fast becoming the norm. The S&P 500 was recently down 3 at 1132.

The increasingly volatile nature of the market is bringing back memories of the height of the financial crisis when markets spiraled out of control. But Bespoke Investment Group delves deeper into the details and finds that while volatility has increased in recent weeks, the market looks downright tranquil compared to the crazy daily moves in late 2008 and early 2009.

S&P 500 has been averaging a daily move of 1.32% over the last month, which firm notes is the highest level of volatility since mid-2009.

“But it was a routine level in 2008 and less than a third of the peak readings seen in late 2008,” Bespoke says, as the index was averaging daily moves of 3.5% to 4.5% a year and a half ago.

“On the market Richter Scale, we’re now at about a 3.5 if Q4 2008 was a 10.”

Bespoke’s “Richter Scale” may not forecast crazy volatility ahead, but the stock market’s fear gauge — the closely watched CBOE’s volatility index (VIX) — is up 5.1% at 32.83 and remains perched above the psychologically important level of 30.

The VIX skyrocketed more than a year and a half ago, but settled down in recent months, only to see a recent sharp spike. It closed above 30 on Friday for only the third time since October.

Stocks have slowly marched higher in recent weeks, posting gains in 10 of the last 11 sessions prior to today and up 5.5% this month alone. But the run-up has stumbled a bit today, with disappointing guidance from General Mills (GIS) and an unexpected drop in new-home sales contributing to the decline. A disappointing five-year cash Treasury note auction also weighed on stocks.

DJIA fell 53 at 10836; S&P 50o dropped 6 to 1168.

Perhaps investors will take this as just another buying opportunity, but the market’s flashing some warning signs that may manifest sooner rather than later. An important indicator of conviction behind a market rally is the number of S&P 500 stocks making new 52-week highs, according to Bespoke.

When S&P 500 made new highs last week, 24% of stocks in the index hit fresh highs. But as S&P 500 once again rallied yesterday to its highest close since September 2008, only 16% of stocks in the index reached fresh levels.

“Ideally, bulls will want to see this list expand as the market trades higher,” firm says. “While one day doesn’t make a trend, if we continue to trade higher without support from the list of new highs, bears will be quick to growl.”

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Runaway train never goin back.

It’s been about 12 and a half months since the stock market bottomed out. And with major indexes up more than 60%, inquiring minds are wondering how much longer investors will be able to ride the easy money train.

After such a furious rally over the last year, one would expect some sort of pullback to come sooner rather than later. Seven of the ten S&P 500 sectors are trading at overbought levels, while none are oversold, according to the folks at Bespoke Investment Group.

“As we have seen since last March, overbought markets can stay overbought for several days or weeks,” firm says. “It isn’t until an event occurs that gives the market an excuse to sell-off that the correction comes.”

Dubai debt concerns in late November as well as proposed financial reform and Greek troubles in January prompted brief pullbacks. With health-care reform passing, Bespoke wonders if this could be the next excuse to sell.

Not yet, as S&P 500 was recently up 5 at 1165. Hard to pinpoint exactly why stocks are higher today. Over the past few months, the market was expecting some sort of health-care legislation to pass. So after all the delays and confusion, it seems like the final vote has added some much-needed closure to the situation, which seems to please investors.

Delving a little deeper into the health-care legislation shows many companies ranging from hospital operators and pharmacy-benefit managers to drug and medical-device makers may profit from the bill.

Still, stocks will retrench at some point – you can count on that. Whether it happens tomorrow, next week, or a few months from now is debatable, but a pullback’s on the horizon. And when it happens, it will put the market at an important crossroads, according to Barron’s Mike Santoli, (hat tip Barry Ritholtz):

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As Paul just noted, easy money and the Fed’s willingness to keep interest rates essentially at zero have been driving stocks higher.

The Dow has hit a fresh 52-week high and S&P 500 keeps inching higher, with many technicians pointing to 1200 as the next stop with little resistance. With investors piling into riskier assets, perhaps there’s another factor driving stocks higher: the good ol’ luck of the Irish.

The Dow Jones Industrial Average has historically performed fairly well on St. Patrick’s Day, averaging a 0.16% gain, with positive returns coming 62% of the time since 1901, according to the number crunchers at Bespoke Investment Group.

That’s much better than the Dow’s average change of 0.025% for all trading days since 1901, firm adds.

The Dow has also risen in five of the last six St. Patrick’s Days, and is poised to extend that streak to six out of seven as the Dow was recently up 79 at 10765. If the Dow can hold the gains through 4:00, it will close on a seven-day winning streak, the longest run since an eight-day gain in late August.

That’s certainly a lot for the bulls to cheer. But have no fear perma bears, there is reason to be cautious. As S&P 500 keeps climbing, Bespoke also points out 85% of stocks in the index are currently trading above their 50-day moving averages.

“At these levels, there really hasn’t been much more room to run on the upside before a short-term pullback (or at least sideways trading) has been seen,” the firm cautions.

(Photo: Wikipedia Commons)