- - Thursday, September 29, 2011


As we come to the end of the third quarter of 2011, people will use various words to describe the overall market, But one word that I think we can all agree aptly describes what we have seen over the past 90 days is volatile.

I can say that because over the past three months there have been more than 30 days that have experienced triple-digit moves in the Dow Jones Industrial Average. Normally I don’t make a big deal of the Dow even though it is the index that seems to get the most play by talking heads and non-financial publications. The reason is the Dow is only 30 stocks and I find the S&P 500, which is comprised of — wait for it — 500 stocks to be a better gauge of the overall market.

Shifting the benchmark, however, does not really change the conclusion because over the past 90 days the S&P 500 had 18 days in which it moved higher or lower by at least 2 percent. The net result is that both indices are deep in negative territory for the quarter and down less but still negative on a year to date basis.

The degree of volatility, while frustrating, is understandable given the news flow over the past quarter. From the near shutdown of the U.S. government to eurozone debt concerns to weak economic data and concerns over a double-dip recession to companies cutting outlooks and resuming layoffs to new job initiatives to heightened merger and acquisition activity and new product announcements, we have been barraged and attention spans have been shortened while the market trades on what was said last.

That pretty much sums up this past week in a nutshell.

Optimism was spreading as it appeared that progress was being made in the eurozone bailout process. That enthusiasm continued when Finland’s parliament approved legislation implementing Europe’s amended temporary bailout fund. The net result was a more than 5 percent move in the S&P 500 from Friday’s market close to Tuesday’s high during early afternoon trading as reports emerged suggesting officials remained far from consensus. After that peak, the S&P 500 and the other major market indices proceeded to fall but still closed in positive territory.

On Wednesday, the S&P 500 again opened strong but faded as investors remained worried about policymakers in Europe, who were still struggling to keep up with the debt crisis. This was fueled in part by the drop in Italy’s business confidence index for September, which reflected slowing global demand, reduced gross domestic product expectations and recently instilled austerity measures by the Italian government. That weak Italian business confidence index reinforced the 15-month low reported earlier in the week for the Ifo Institutes September German business confidence index. Ifo’s reading reflects 7,000 monthly survey responses from German businesses in the manufacturing, construction, wholesale and retail sectors.

As I write this Thursday, the market has been on a see-saw ride that started up strongly but now after 2 p.m. has headed into the red. As it stands now, the S&P 500 is still tracking to deliver a positive week, however Friday is the last trading day in the quarter and as such is likely to be subject to some window dressing.

Window dressing is a strategy used by portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, a fund manager will sell stocks with large losses and purchase high-flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings, but while this may make a fund appear more attractive than it really is, this slight of hand only covers so much before the underlying performance is evident.

Stay tuned as we prep for corporate earnings pre-announcements as the books on the third quarter of 2011 close and we gear up for October earnings season.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.



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