In mixed economic news, jobless claims rose more than expected last week and weak manufacturing data was reported from both China and the euro zone. On the upside, the Labor Department reported initial applications for jobless benefits rose by 4,000 to 372,000, above the 369,000 level expected by economists.
While the Federal Reserve stated in their minutes that they, on balance, were for more quantitative easing in the form of what is commonly known as QE3, U.S. Federal Reserve Bank of St. Louis President James Bullard said he was against another around of quantitative easing at the moment.
A pullback on lower volume was observed in the major indices. After the two week uptrend, this can be considered constructive, and the market is likely in need of some consolidating action to work off the bullish momentum that has built up as investors have been forced to enter the market, and the indexes have moved sharply to the upside throughout the month of August. While some may point to the low levels of the CBOE Volatility Index (VIX) as a sign of an imminent top, we would point out that the VIX can remain low for long periods of time, and particularly in the face of a strong market rally. We must remember that the VIX as an indicator is derived from the market's action and not the other way around, hence some idea that a low VIX is, in and of itself, a reason to predict a market top strikes us as overly simplistic and a flawed "reverse causality" argument at best. If the price/volume action remains constructive, and leading stocks continue to act well, we would not be sellers of stocks solely on the basis of where the VIX is.
Both gold and silver continued their upward surge as accelerated quantitative easing in the form of money printing is expected. Both are in long bases so some retracement of at least a portion of gold and silver's sharp upward move over the past week would be considered normal given the metals' inherent volatility, setting up the potential for a longer, smoother uptrend to develop. It was somewhat notable yesterday that precious metals traded higher while stocks pulled back.
Overnight, the Chinese Shanghai Index dropped 0.9% as it moved to a three-year low, and this has contributed to a slightly negative tone to the tape this morning as European markets trade down with the FTSE leading the way down on a roughly 1% decline, while U.S. futures are "flattish" to down two hours before the market open.