A Sideways Summer Stall?

The markets have made a decided move to the upside since late June, but during the past couple of days we’ve seen a bit of a summer stall. Trading volumes have been relatively light, and the markets now are keying on the bevy of earnings reports that have come in.

So far, we’ve seen some high-profile earnings winners, notably Apple (AAPL), Boeing (BA), General Electric (GE) and Ford (F). We’ve also seen some high-profile earnings disappointments, such as Caterpillar (CAT), Coca-Cola (KO), IBM (IBM) and McDonald’s (MCD).

Now that we are in the heart of earnings season, I expect the markets to tread a bit of water here while we wait for additional data. Of course, the big tailwind for stocks here, as it has been for several years, is the Federal Reserve. The quantitative easing (QE) “taper” talk now seems to be on the back burner, and traders are counting on the fact that the Fed will be there with the easy money whenever the data gets soft. And even if the Fed moves to begin pulling back the reins on its bond buying scheme, the market is convinced that this won’t be significant enough to derail the monetary gravy train.

Now, when it comes to international markets, and particularly emerging markets, we see that there’s been a lot more volatility than there has been here at home. The chart below of the iShares MSCI Emerging Markets (EEM) shows the big comeback in the sector since it fell to its June lows. EEM now is back above its 50-day moving average.

The catalyst for this sector was the recent news out of China that the policymakers will do whatever it takes to make sure economic growth stays above 7% for the year. While I am not sure if China’s leaders can make good on this promise, I do know that they will move to inject more stimulus into the system in an attempt to shore up the perception that China’s growth is contracting too fast.

I suspect this situation would be bullish for EEM going forward, so keep an eye on this sector in the weeks to come.