Equity markets were higher to close the week after economic reports showed strength in the US employment markets and the European Central Bank (ECB) announced its willingness to enact government bond buying programs in order to support regional growth prospects. The validity of last week’s optimism can be seen in the performance of the S&P 500 which managed to add 1.4 percent during the period (rising above 1460), which is a sharp reversal after the 1.7 percent declines that were seen in the last two weekly periods. A good deal of buying was also seen in the Dow Jones Industrials, which added 1.3 percent (to trade above 13,610) which is the highest trading level we have seen since very bullish period seen in December 2007.
Improving economic figures and supportive commentary from the ECB will next be factored in along side corporate earnings guidance which is likely to be the guiding factor for the next major trend in stock markets and in high yielding currencies. Traders will use these earnings results to make the collective overriding decision which will determine whether or not stock prices are higher at the end of this year’s trading.
A Look at the Economic Data
But even with the earnings reports to come, the main story last week was the Unemployment Rate in the US, which came in much lower than expectations and dropped to 7.8 percent for the month of September, which is the lowest rate of the Obama presidency (which began in early 2009). These figures were particularly encouraging because the came along with stronger manufacturing and productivity data, which shows that the recovery is extending on a number of different fronts. But the positive stories were not seen in the US alone, as the ECB also brought some uplifting commentary, and this helped to keep the DAX, CAC and FTSE achieve gains during the week as well.
Looking ahead, we could see some vulnerability in this rally (which has been propelled largely by the 11 consecutive quarters of earnings growth posted by the S&P 500) as analysts are expecting declines of 1.7 percent in this quarters posted results. While markets are likely to respond favorably to any upside surprises, it should be remembered that prices are currently at elevated levels and that we are seeing much more downside risk that upside potential given current market valuations.
The S&P 500 has seen rallies so far this month but looking at the 4H charts, but we saw prices retrace nearly 38.2% of the move from 1420 into the close of the Friday session. This is a suitable level for short term long positions are we start next week. The true retracement level comes in at 1450, which is also a psychological and historical level, so we will likely see some bounce here before further runs higher are seen. A break here, would target a drop back to 1435, so keep stops tight but moving average support will likely limit losses much below here. Bias turns to bearish on a 4H close below 1425.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.