Global Macro: Equities Begin Their Correction

TheStreet.com

NEW YORK (TheStreet) -- As summer comes to an end, trading volume remains low and uncertainty over central bank policy weighs on investors' minds. The low volume means price swings are more volatile than usual. With less of a fight between bulls and bears, markets are more easily swayed by strong conviction from one side or the other.

U.S. equity markets appeared to be overbought for the past few weeks, as prices trended sideways. A correction finally occurred last week when fears of Federal Reserve policy tightening overtook trader sentiment.

The chart below is of SPDR S&P 500. The equity index traded in a tight range for most of July and August. The index surpassed the 1,700 level for a few days, but lacked a catalyst to push it above that level.

As uncertainty overpowered the excitement of reaching record highs, investors were quick to take profits and selling pressure soon got the best of equity markets.

The index now trades well below its 20-day moving average, and leading up to the September Fed meeting, it looks as if there won't be any catalysts to return prices to record levels. Equities should continue downward or trend sideways for the next few weeks as investors price in the future of U.S. monetary policy.

The next chart is of iShares Russell 2000 Index. This index represents small-cap U.S. equities. In times of equity market weakness, small-cap stocks lead indexes lower.

The Russell 2000 Index broke lower alongside large-cap equities last week and similarly trades below its 20-day moving average.

As long as both large-cap and small-cap stocks are trending lower, investors should look toward safer assets to put their money such as precious metals or assets that track volatility.

The last chart is of the CBOE Volatility Index, better known as VIX. The VIX looked to be developing a bottoming pattern as I stated in an article last week. The VIX subsequently broke higher, from its lows, and above its 20-day moving average.

An exchange-traded fund that closely tracks the movements of the VIX is iPath S&P 500 VIX ST Futures ETN.

Low-volume and overbought equity markets prompted the move higher, and should allow the index to remain at elevated levels until definitive information is released surrounding the future of U.S. monetary policy.

Look for pressure to remain on U.S. equities for the rest of the summer and volatility to increase as investors attempt to get an edge on the Fed's next move.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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