Stock market investors take a break

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Updated: January 23, 2012 2:27AM

In following the stock market of the past couple of weeks I think we’ve run into a case of buyer’s fatigue.

This can be seen in the market’s (S&P 500) movement and volume over the past month. Starting in late April the trend has been predominately down, but just as tellingly at the same time the volume of shares traded every day has diminished on an almost daily basis as well. This trend has caused the index to lose a little less than 3 percent and is leaving investors with very little conviction to go on one way or the other.

I would characterize this market action as not so much a general sell-off, but rather as a general break in buying. When new money flows into the market dry up, we are left with only sell-side pressure and, in the case of the current trend, while the sell-side pressure is consistent, it’s not extreme, and so we are kind of stuck in this vacillating sideways cycle.

If you’ve read this column over the past month then you’ve seen this cycle in action. I like the idea of owning stocks as our best companies continue to enjoy rising profits, have strong balance sheets and pay nice dividends. But at the same time there are dark clouds on the horizon and I find myself unable to pull the trigger, buy or sell, either way.

So what are those clouds? Well, here in the U.S., the No. 1 issue on the horizon is the end of the Federal Reserve’s QE2 bond buying program that is scheduled to end next month. By the time this program is over, the Fed will have pumped about $600 billion of reserves and new money into the financial system, much of which eventually worked its way into the stock market. This artificial stimulus has been effective at raising stock prices and it’s no coincidence that the current market rally started the day the Fed announced it’s QE1 program in March 2009.

The end of this program leaves two really big questions: What will happen to interest rates? And can the stock market continue to go up without this artificial stimulus? And believe me, those are two really huge questions.

The other cloud is hanging over Europe. We all know something has to give with the European debt crisis and the worst-case scenarios are beyond terrifying (ala 2008). We all hope that the Europeans can figure out a way to squeak out of the mess they’ve gotten themselves into, but hopes seem to diminish on a daily basis as well.

So how do you buy into the market with these issues hanging out there? I tend to be more in the mood to take a bit of profit where I have it, and sit on the stocks and collect my dividends on the ones I don’t want to sell.

Which I guess that leaves us right where we started.