The summer is over, at least in Wall Street’s eyes, and traders now have returned to the floor after the long Labor Day weekend. Back to work means back to big trading volume, and I suspect that means we could see a return of volatility.
To be certain, this year volatility has been largely absent, and, except for a few scattered weeks of fearful selling in January, April, late July and early August, things have been steadfastly bullish. In fact, recent action in the S&P 500 tells the tale of a market determined to push higher.
After falling to an approximate three-month low on Aug. 7, equities staged a nice rally that saw the S&P 500 rise in 12 of the last 16 trading sessions. The broad-based measure of the domestic market now trades just above the psychologically significant 2,000 level.
The question many, including me, are asking is can this rally keep going without another significant pullback?
I suspect the answer is “no,” but this market has continued to surprise. The biggest surprise to me is the continuation of extremely low bond yields (interest rates), which has caused bond prices to continue to move higher. I doubt many market pros thought that after the first eight months of the year, the iShares 20+ Year Treasury Bond ETF (TLT) would be up 17%, more than doubling the S&P 500’s 8.4% year-to-date gain.
Given this market’s penchant for surprise, I think we have to be very vigilant at this juncture, especially as we move into the seasonally weak months of September and October. To keep tabs on any change of direction in stocks or bonds, be sure to take at least a weekly look at several key charts, including the S&P 500, the 10-Year Treasury Note Yield ($TNX), the US Dollar Index ($USD) and an international index such as the iShares EAFE Index (EFA).
Keeping tabs on domestic and international stocks, as well as the value of the dollar, and the action in the bond market, is a great way to give yourself the heads-up before any meaningful market shift takes place. The idea here is the better prepared you are to deal with volatility, or a change in direction, the better investor you’ll be.