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Equity Markets to Track Higher in September Before Election Correction


The stock market continues to track the typical election year chart pattern.


To this "low volume" point, the eagle-eyed folks at the Bespoke organization had this to say:

In order to illustrate the fallacy of this argument, the chart below shows the performance of the S&P 500 since the bull market began on March 9, 2009 along with its performance if we took out all days where volume (as measured in SPY) was below the 50-day moving average. So far this bull market [has left] the S&P 500 up 108.5% (blue line). If you back out all days (up and down) over the same period where volume was below average, you come out with a decline of 30.1%. Bears can argue whatever they want, but if you followed the low volume argument, you would be down 30.1% instead of up 108.5%!

This week, however, volume will not be the question du jour as participants put on "rabbit ears" for what is said at the Jackson Hole meeting. Indeed, the Kansas City Federal Reserve will again host the annual Federal Reserve meeting near Yellowstone National Park with the highlight being Ben Bernanke's Friday morning speech where Wall Street will be looking for hints of future policy moves.

If you will recall, I was wrong-footed at the last Fed meeting in thinking that there would be a change in Mr. Bernanke's policy statement. My reasoning was that the Fed would change its policy statement on fears it would be viewed as too political by changing its policy statement at the September meeting, which is so close to the presidential election. Accordingly, this week's Jackson Hole's affair may be the last chance for the Fed to act.

That said, while the economic figures have strengthened over the past few weeks, this pattern did not hold last week. Whether that will cause Ben Bernanke to lean toward another quantitative easing should be the focus of the week. If QE3 is the "call," the SPX should vault above the previous reaction highs of 1420 – 1422 with price objectives of 1477 and then 1509. If not, it likely implies the indices will have to spend more time digesting the ~12% rally from the June 4 low.

Whatever the outcome, I think any correction will be shallow with the path of least resistance remaining to the upside with the "carrot in front of the horse" being the under-performance by the pros staring at the end of the quarter performance derby. Manifestly, most investors I know are dramatically underperforming the major indices.

No positions in stocks mentioned.
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