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August Ends Depressed

The month of August is usually a very light volume trading month that generally favors higher prices for the stock market indexes. Well, that was not the case this month as the S&P 500 Index is down nearly 8.0 percent from the August 9th pivot high of 1129.00 on the broad based index. This decline comes after the Federal Reserve Bank kept rates unchanged on August 10th and Fed Chairman Ben Bernanke vowed that the Fed has many more tricks up its sleeve to keep the market afloat.

Is this something that one would want to invest in? There is only so long that the powers that be can try and drive the dollar lower in order to inflate the major stock market indexes higher. Their strategy is obviously not working because oil is having trouble trading higher and that is even with the geopolitical fear premium that is built into the price. That is showing lack of demand even with China booming. Gold continues to trade higher which tells the market participants that the market is being supported artificially and the institutions believe that gold is the one true currency. Bond yields remain at extremely low levels despite all the talking heads calling it a bubble. How can it be a bubble when the Federal Reserve Bank has the Fed funds rate at zero percent since December 2008, and the market is still stalling out. Where else do you expect the institutions to put their money? They already own gold and a yield in a bond is better than no yield at all.

Perhaps all of this propping and artificial stimulus is not what the market needs after all. Perhaps the market needs things to fail. Yes, I said it, failure. Perhaps, the markets need to get back to capitalism the way it was designed to work. Capitalism is not designed to reward failure. It was designed to let bankrupt business' fail. However, in this current system failure has only been rewarded and continues to be rewarded. Look at the large banks and insurance companies that should have failed. They are still holding toxic assets that cannot be calculated. However, due to the rules being changed in the middle of the game these toxic assets are now considered good assets and help there balance sheets instead of hurting them. Whats wrong with this picture? I once read that if you bury nuclear waste materials in a sealed container underground they will eventually rise to the surface and cause even more havoc on the environment. Well, that looks to be taking place now.

Look at the housing market. Now the banks that gave the bad loans have been bailed out so are the people that took the loans. Some people are actually living in these shadow foreclosed homes for years now without even paying their mortgage. How long can this insanity go on? Something eventually has got to give. In any case, the month August is ending very poorly on extremely light volume. This is bearish action and should keep us on our toes into next month when the something or someone else gets bailed out.

Nicholas Santiago
Chief Market Strategist