August Shows Biggest Monthly Stock Rally Since March on Possible Stimulus Plans
The Standard & Poor’s 500 benchmark stock index is closing the month of August in positive territory with the biggest 4-week rally since March after moderately positive remarks from Federal Reserve Chairman Ben Bernanke. At the closely watched Jackson Hole symposium Bernanke did not signal the most positive outcome (which would have been an outright indication of plans for additional monetary stimulus) but his comments were encouraging enough to keep markets supported for the time being.
Specifically, Bernanke suggested that further quantitative easing measures remained a possibility, given the historically high unemployment rate and the dragging effects of the Eurozone debt crisis on the US economy. Generally, the fact that the possibility isn’t being ruled out has been enough to keep traders from aggressively selling the broader indexes but there have been some negative headlines (mostly involving Spain’s plans for bailout requests) that could re-surface in the coming weeks.
August Performance Keeps Stocks Near Yearly Highs
We have seen some moderate declines in recent sessions, as Spain’s reluctance to accept the proposed terms for the Eurozone bailout loans is creating an added element of uncertainty for the region (putting pressure on the Euro and the DAX). But these losses lacked significant follow through with markets still managing to see gains of nearly 2 percent in the S&P 500 this month. This is the third consecutive month of gains in the benchmark and this trend is being matched by most of the major indexes measured globally.
Trading volumes remain low (raising doubts about the true extent of the market’s seemingly positive sentiment) but this is likely to change in the next few weeks as the investor community comes back to full strength in the Autumn. Looking ahead, analysts will be paying special attention to the next set of jobs numbers, given the strong language that was expressed by Fed members at the Jackson Hole meeting.
A positive number in the next jobs report will bring buyers back into the US Dollar but will likely weigh on stock markets as consensus opinions will see little or no reason to believe that stimulus measures will be implemented in the US. Given all of these factors (the importance of the next US Non Farm Payrolls report and the increases in trading volume that are expected) we could see some drastic increases in volatility as investors position for the next dominant trend moves.
Price activity in the S&P 500 has entered a consolidative phase but we are holding at the upper levels inside of a long term uptrend channel. A double bottom is now in view at 1395 and we will need to see a break here in order to shift to a downward bias in the short term. To the upside, the next level to watch comesin at 1415 (which is a resistance triple top). This represents a tight range with clear parameters, so the directional break will likely determine the trend that we see next week.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.