Stock Markets Post Strongest Rally Since June on US Budget Confidence
Most equity markets were propelled higher into the close of the week as news headlines centered on the comments made by US President Obama, which suggested that an agreement will be reached with respect to the US budget, and that the negative ramifications of the Fiscal Cliff will be largely avoided.
Of course, the discussions between the Democratic Senate and the Republican Congress are still in their early stages, so it remains to be seen if these positive expectations will actually pan out when the crucial votes are held. The S&P 500 had its best weekly performance since June of this year, and the general feeling of optimism was helped by positive economic data from Germany and China, which is leading to supportive arguments for the prospects of global growth into the end of the year.
Weekly Rallies Broad Based
When looking at the specific industry performances within the major stock indices, it is clear that these latest rallies were broad based and included most of the major industry groups. Nine of the 10 industry groups in the S&P 500 posted a positive performance for the week (the utilities sector was the only laggard), and the upward moves were relatively large even with the holiday thinned trading volumes that came as a result of the Thanksgiving holiday.
Overall, the S&P 500 added a massive 3.6% gain for the week, closing just below 1410, and this equates to a rise of 12% so far this year. The Dow Jones Industrials fared almost as well, posting gains of 3.4% and closing above the much-watched 13,000 level. In both cases, this was the best weekly performance since the early part of June, so the upward momentum is likely to continue at least into the early part of next week.
Looking at the broader economic data, there were some significant developments in China, with the PMI manufacturing survey showing expansion for the first time in 13 months. Other reports economic reports this week showed that the housing market in the US is showing signs of strength and that business confidence in Germany was higher than analysts had anticipated.
But, as we move into next week, any rallies will continue to be vulnerable if we see any signs of resurgence in the efforts of Palestinian militant groups or any indication that the Fiscal Cliff discussions are not moving along as planned. Either of these factors could lead to additional uncertainty, which would likely result in stock markets giving back some of last week’s gains.
The latest moves in the S&P 500 were highly significant, as prices have now shown a clear bounce off of Fibonacci support (the 61.8% retracement of the rally from 1260) at 1345. The confirmation of this support level came as prices pushed through the “support turned resistance” level at 1390, and the scope is now for gains to see a rally to at least 1430 before any stalling is expected. Longer term, we need to see 1345 break before the bias turns bearish.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.