Long on volatility, short on meaning

September 3, 2009

It’s hard not to be cynical about what the markets are supposedly telling us this week.

Don’t get me wrong, I think markets can be a good barometer for sentiment and a leading indicator for trends before they bubble to the surface.

But their behavior this week suggests that the few traders and investors working during these dog days of summer are more interested in pushing prices around for short-term gain than making a bet on where the economy and financial markets are heading.

It’s nothing new that trading desks are thinly staffed in the last weeks of summer, but after last year’s rude interruption of summer holidays, more are taking advantage of the relative calm this year to soak their feet in the ocean rather than man the phones.

That’s caused some interesting cross-currents that are making the message a bit of a muddle. Today, for example, oil prices rose early on hopes of an economic recovery while gold, a haven for those seeking a safe harbor, marched toward $1,000 per ounce as investors grew more cautious.

And Treasuries, after two days of solid gains despite better than expected economic data, fell today as investors continued to look to the stock market rather than data for clues.

Treasury yields, in fact, had been threatening to break back to lows seen in May even though the government has flooded the market with new notes — $70 billion more to come next week — and the economy has improved markedly since then.

Manufacturing is expanding, the rate of job losses, though still uncomfortably large, has slowed and the housing market that got the U.S. economy in such a mess in the first place is no longer in freefall.

And then there’s the influence of the Chinese stock market. A 4.8 percent gain in the Shanghai Composite index got the ball rolling for global equities earlier today, but was the catalyst a data point or signs of better days ahead? No, it was a regulator telling investors that the market was healthy.

Earlier this week, the turning of the calendar to September — a month that now strikes fear into even the most rational investor, after last year’s meltdown punctuated what had already been a historically bad month for stocks — did the trick.

Suddenly, investors worried about the health of the banking sector, even though the rally since March has been wedded to its supposed recovery.

Even Friday’s jobs report, one of the most influential economic indicators, may not be enough to infuse much meaning. It comes ahead of a long holiday in the United States that brings an unofficial end to summer. That should make it even easier to push and pull prices around.

This should begin to change next week as holidays end and liquidity returns. That doesn’t mean investors will like the message, but hopefully it will be clearer.


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