Wednesday, August 09, 2006

The Fed Pauses and the Market Yawns

It's been a while since my last post and while much has changed, you can't count the market averages among the changes. On August 1st, the date of my last post, the Dow stood at 11,125.73. Today we closed at 11,076.18. Between those two dates we got an employment report that showed job growth still slowing, a report showing productivity falling and wage inflation rising, various reports confirming the slowdown in the housing market, a shutdown of the largest US oil field in Prudhoe Bay and a pause in the Fed's rate hiking campaign. That sure seems like a lot of info for such litte movement in the averages.

Only one of these things was unexpected -- the Prudhoe Bay shutdown -- and that didn't exactly start a trend. Oil prices have been rising for some time due to various factors, so adding another didn't seem to matter much. All the other items were well anticipated by the market and it's usually the unanticipated event that causes big changes in the market. Welcome to the summer doldrums.

The sentiment about stocks and the economy are quite negative right now, so any positive devlopment would certainly be unexpected. I don't know what the news will be, but experience tells me that when sentiment is this negative, something usually comes along that surprises the crowd.

It's interesting to observe the buyers and sellers in this market. On the buy side you have private equity funds and corporations, mostly buying back their own stock but with some merger activity thrown in. On the sell side is mostly the retail crowd. There were outflows from open end equity mutual funds in June and July, indicating that the average investor was getting out as the market fell. Interestingly, ETFs continue to attract new funds; including ETFs there were inflows to equity mutual funds during July. Since, the ETFs are being increasingly traded by hedge funds, one could argue that ETF inflows during July were a result of professional traders buying rather than retail investors.

So, the pros are buying and the average investor is selling. I suppose this could be the one time when the retail do it yourself investor is right, but I'm not betting on it. My guess is that by the end of this year, those June and July sellers will be regretting that decision. And preparing to pay a tax bill as well.

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