Daily Market Update – August 27, 2014 (9:00 AM)

The S&P 500 doesn’t get the attention from most people that the DJIA does, but it got its fair share yesterday as it eked out a close above 2000 for the very first time.

The milestone was celebrated on the national news, whereas it rarely gets otherwise mentioned, other than being briefly posted on screen along with other closing prices, When the DJIA hits a new record high, its announcement is obligatory, but not so for the S&P 500.

Yesterday was different, though. The world loves a round number and inevitably discussion will begin regarding the amount of time taken to double that index comparing it to previous round numbers. 500 in 1995, which was quickly doubled and 1000 in 1998, which was finally doubled after 16 years.

This morning the chairman of the S&P 500 Index Committee commented, in passing, that money was coming off the sidelines. Unfortunately, there was no follow-up to that comment, neither to clarify it, question it or interpret it.

It would be hard to imagine a doubling at the same pace as occurred between 1995 and 1998, which was fueled by the dot com boom, but now in hindsight the 16 years taken to get to this point seems so long and so slow, but along the way there were a few obstacles, such as the dot com bust and the financial crisis.

The belief by David Blitzer of S&P 500 that money is now coming off the sidelines should either make people very happy or very cautious. There’s reason to be both, but it’s the time frame for each that is the challenge.

Whether to be ebullient or cautious depends on whether the psychological component of investing, which also includes following pure emotion, trumps technical and fundamental analyses. If you’ve been keeping your cash on the sidelines and taking the number 2000 as an indication to do otherwise, its probably the latter

The early morning indication is of no follow through to yesterday’s gain, which was already in the process of being winnowed from the day’s earlier levels.

It’s hard to say what has been responsible for the sizeable gains of the past three weeks. The most likely explanation is that it is either the expected bounce back from the mini-correction which itself appeared to be related to geo-political news or the complete absence of such news in the past few weeks.

If following previous patterns of returning from mini-corrections the market will be seeking even higher levels from here. If there is, indeed, new money coming from the sidelines, that would also mean that there’s fuel for that sort of rally.

Normally, the first key to  that sort of increased participation is inflow into mutual funds and then increasing trading volume. Unfortunately, with the summer now coming to an end, it may be difficult to discern any sidelines cash fueled increase in trading volume from what would normally be expected once the summer
has ended.

That means the first sign of anything percolating may simply be continued price acceleration.

So, do you get ahead of the curve or do you believe that the scenario is too simplistic?

I have no clue, but generally being reluctant to chase prices, I have a hard time biting at the lure being dangled. I don’t mind sitting back and letting the heavy lifting being done by the market and being the beneficiary for now.

With very few positions set to expire this week, it may end up being the quietest week of the year, unless some more new covered positions can be created, which might be the best benefit of a continued market climb.