If you are wondering about the strength of the current rally, and where stocks are going, have a look at this chart of the Dow over the past four months.
Notice how the market head higher at the beginning of each month, and then drops sharply in the middle, only to start creeping higher toward the end of the month?
We had drop toward the end of October, and so we’re probably due for another drop again in mid-November. What’s happening, of course, is that traders are putting money into to stocks, and then taking profits as the upward movement reaches its peak.
The regular movement here should not surprise you. It has nothing to do with economic recovery, earnings announcements, or any other major macroeconomic event – although some really bad news like a war would probably send stocks plummeting.
There are two drivers behind the trend:
1) Low levels of investment coupled with low volume—institutional investors aren’t putting their money on U.S. markets. They’re moving into commodities and gold. If they do any equities investing, it’s probably in emerging markets. Several trillion dollars have been drained from U.S. stocks, and it’s not coming back for a long time. The low levels of trading volume that we’ve seen in the past months are indicative of this trend.
2) Increasing importance of high-frequency trading. About 70% of all trades on U.S. stock markets are made by high-speed computers executing complex, long-term trading strategies. In this low-volume environment, the markets are rising and falling as these machines invest, then take profits. The predominance of high-frequency trading tends to create regular patterns.
The result is that, after the drop off we expect in mid-November, the market rally will continue for some time, petering out around Christmas, unless finally some really positive economic news attracts more money to the exchanges. So there’s still time to make some money in this rally, but don’t wait too long.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com