Markets around the world plunged so dramatically after topping out at the end of April (the S&P 500 down 18%), that they became very oversold short-term, a condition that usually results in at least a short-term rally off the oversold condition, a so-called relief rally.
And sure enough a relief rally did get underway last week. Its beginning was impressive. The Dow gained 673 points, or 6.2% in just three days.
But it immediately stumbled and has plunged sharply, giving back most of the gain in the following three days, keeping alive the pattern of extreme volatility of the last few months.
It may be just continued volatility, with the next few days being back to the upside. The main support for that thought is that the three-day rally was not enough to alleviate the oversold condition.
However, it’s just as possible that the expected short-term rally off the oversold condition has already ended.
In spite of the spike-up of its first three days, it has not been an impressive rally attempt. Daily trading volume on the NYSE, which had been as high as 2.5 billion shares during the market’s decline from its April 29 peak, dried up to fewer than 1.0 billion shares on the up-days. That’s an indication large institutional investors were not believing in the rally and not much should be expected from it.
And that’s understandable given the additional evidence this week that the economic soft-spot of the first half of the year, which was supposedly temporary, is continuing in the second half. That’s particularly worrisome since the economic soft-spot of the first half was much worse than previously thought.
GDP growth, previously reported as having been around 2% in the first half, was recently revised to being up only 0.8%.
The strong growth that was supposed to return in July to begin the second half did not show up. In fact, consumer and business confidence deteriorated further in July, accompanied by unexpected further declines in both the manufacturing and services sectors.
Now evidence is piling up that the deterioration is continuing in August.
This week’s reports included that the Fed’s Empire State (NY) Mfg Index not only remained negative in August but deteriorated further to –7.7 from -3.8 in July. Within the report, the New Orders Index fell further to negative -7.8 in August, not encouraging for business over the next couple of months. To the extent that the New York Index often is a precursor for the national ISM index, it was not a good report. The NAHB reported its Housing Market Index, which measures the confidence of the nation’s home-builders, remained unchanged in August, still mired in the pits at just 15 (on a scale of 1 to 100).
There were also signs that inflation, which has been a big problem in Asia and South America is now washing ashore in the U.S. and Europe.
In the U.S. it was reported that the Producer Price Index was up 0.2% in July, and the core rate up 0.4%, and the Consumer Price Index was up 0.5% in July, after an encouraging decline in June.
In Europe it was reported this week that the economy in the 17-nation euro-zone slowed to just 0.2% in the 2nd quarter, barely above negative growth (recession). And inflation in the U.K., which is not a member of the European Union, accelerated to a 4.4% annualized rate in July, more than double the U.K. central bank’s inflation target rate of 2%.
Another major problem for markets, the European debt crisis had supposedly been kicked further down the road. But it has come rolling back. The international bailout of Greece ran into trouble Thursday when at least five euro-zone countries demanded that the Greek government provide them with cash as collateral for their contributions to the $157 billion bailout.
As I said in last week’s column, the oversold rally is likely to be a last opportunity for investors to take some risk off the table by selling into the strength, since although the short-term oversold condition made a short-term rally likely, the correction is likely to resume to lower lows when it ends.
But could it already be over, after only three positive days?