Corrective Action In the Market Could Be Developing

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Our Federal Reserve-centric stock market followed the script on Friday, moving both up and down as Fed chair Janet Yellen used her Jackson Hole speech to say something while committing to nothing.

Stocks briefly rose when Wall Street focused on Yellen's remarks that the Fed might use additional stimulus tools, with the Fed chief saying: "Future policymakers may wish to explore the possibility of purchasing a broader range of assets."

But equities quickly fell back as the business media quoted Yellen as saying: "I believe the case for an increase in the Fed funds rate has strengthened in recent months."

The Fed chair argued that the data show the U.S. economy is reaching both full employment and the central bank's inflation goals. Vice Chairman Stanley Fischer thentold CNBC that Yellen's comments were "consistent" with a September hike.

Contributing to the downside move, St. Louis Fed President James Bullard more or less warned of possible asset bubbles on Friday. Traders and investors also decided to rethinkhawkish comments that Kansas City Fed chief Esther George had given on Thursday.

All in all, as I wrote in Friday's missive The Fed Has No Cred, the central bankers' musings and arguments are beginning to resemble the U.S. presidential election!

Was Friday a Reversal Day?

The market ultimately ended Friday off of its session lows, but the S&P 500 modestly breached its six-week-old narrow price range to the downside.

My guess now is that corrective action could be developing after Friday's loss of momentum. Step back for a moment and you'll see that nearly all of the S&P 500's post-Brexit-vote gains came in the first three weeks following Britain's June 23 referendum.

While stocks have seen been selective follow-through since mid-July, the market's strength has narrowed. That's a warning sign. Telecoms, utilities, REITs and defensive consumer staples closed near multi-month lows, while technology, banks and brokerages ended near their multimonth highs.

Market sentiment has become similarly bifurcated. While investor sentiment as measured by various surveys remains at a bullish extreme, most of business TV's "talking heads" are alert to the uncertainties that surround the November election and the market's historical September weakness.

Lastly, intermediate indicators like the McClellan Summation Index remain at high overbought levels.

The Contrarian View

Now, I always like to consider contrarian possibilities, and today, I see two potential ones:

* A continuation of a narrow trading range and very low volatility, which we saw in the month-long period prior to Friday.

* A quick market drop and a spike in volatility.

But the clues are unclear as to what's really going to happen. After all, we saw a sharp U.S. dollar bounce on Friday, while gold broke down to a recent low and bond yields moved above their recent range. (The 10-year U.S. Treasury yield closed at 1.62% after trading in a 1.5%-1.6% range for weeks.)

The Bottom Line

I suspect that Wall Street will be thinly populated Wall Street during this last week of August as we head toward the long holiday weekend.

So, it wouldn't surprise me to see weekly volume hit a low, with prices continuing in a narrow band. As such, I think that we'll get little indication this week of stocks' prospective price movements into the autumn.

Nevertheless, I'm left with two key conclusions and observations from last week:

* The markets are moving more than ever in response to "Fedspeak."

* Friday was something of a reversal day, at least in technical terms.

Add it all up and, I remain cautious for the post-Labor Day period. So, I'm sticking with the investment mantra: "Sell In September or Get Dismembered!"


Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at  

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