By Lawrence G. McMillan
The stock market, as measured by the Standard & Poor’s 500 Index (SPX) has been struggling this week. It hasn’t been going down, but it’s been apparent that it was too overbought to go up much, either. Then today, Fed Chairman Bernanke announced the de facto beginning of QE 3, which propelled financial assets of all sorts (except the U.S. dollar) to rally. SPX moved 20 points off its lows; T-Bond futures soared more than two points, Gold rallied $60, and so forth. You get the idea.
Can this be sustained? Maybe for a few days (see the Market Insight section for some commentary on that), but this market is due for a breather. Perhaps traders are reluctant to sell in January, for they don’t want to start the ball rolling downhill before they get the chance to record profits for what is a certainly a strong month for most.
SPX itself is trading over 3 standard deviations above its 20-day moving average. Granted, with actual (historical) volatility down to 10%, it’s much easier to be three standard deviations above the moving average, since the distance of a standard deviation shrinks when volatility does. Still, this is an overbought indicator that has produced some sharp declines over the last year whenever SPX gets this “stretched.”
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