Stocks Reach New Records as Budget Deal Passes
Stock markets have been an uncertain bet in recent weeks, as the US government shutdown has prevented investors from buying riskier assets until a resolution could be reached. Fortunately, stock investors got what they were looking for last week, as Republicans and Democrats in the US were able to reach a budget compromise that allowed the debt ceiling to be raised without triggering debt defaults.
An event like this could have put markets in a tailspin, as investors would have a very difficult time assessing the economic implications that would have arisen if the world’s largest economic was forced to deal with an unprecedented debt default. For these reasons, it was not entirely surprising to see benchmark indices like the S&P 500 trade under pressure for most of the month. But these bearish trends seem to have abated, as the S&P 500 posted new record highs during the week and market favorite stocks like Google (GOOG) hit highs above $1,000 per share for the first time in the company’s publicly traded history
Looking ahead, most of the market’s attention will start to re-focus on the possibility of Federal Reserve “tapering” in its quantitative easing stimulus programs. Employment data will be key in making these assessments and the next Non Farm Payrolls report will be released on Tuesday to give markets more data on which to base decisions. Stronger numbers will indicated the Fed has room to start reducing stimulus purchases (bearish for stock markets), while a weaker number will indicate QE programs could continue into next year.
The S&P 500 is now trading at record levels, and this makes it impossible to define levels of historical resistance. But since we are still trading in a clearly defined uptrend channel, it is undeniable that the momentum favors bullish traders and that the index should be bought on dips. The first important level of support can be found at 1655 and given the size of the latest moves, it makes sense to wait until this level is tested before getting long again.
The FTSE 100 has shown some erratic bounces higher, and this indicates that the index is likely to trade in a more volatile fashion when compared to its stock index counterparts. This makes it difficult to place stops in long positions, as there is a chance that the trade could be stopped before reversing higher. Wait for a drop back to 6590 before buying.
The DAX posted price activity that was not as bullish as the FTSE or S&P 500 but we did manage to see a break above resistance at 8850 before the end of the week. This turns the outlook cautiously bullish but the index is still vulnerable to false breaks. Look to set buy entries near 8810 before looking for new monthly highs.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.