Stock Rallies to Remain Limited
Stock markets in all of the major economies have started to exhibit a common theme in the last few weeks, as any attempts from bullish investors to generate new rallies have been weak in terms of overall momentum and sustainable follow-through. Reasons for this have come from a few different directions. First, the underlying story in several emerging market economies are suggestive of near panic conditions in terms of current account deficits. The biggest example of this can be seen in India, but the problems have spread to Southeast Asia as well, with other notable examples seen in Thailand and Indonesia.
For most of the year, stock markets in most emerging market economies (including China) have seen performances in bear market territory, which is something of a surprise given the relative performance that has been seen in developed economies during the same period. Broadly speaking, benchmark indices in the US, UK, and Eurozone have posted double digit gains as the global recovery continues to show improvement.
The month of August has seen a downward correction, however, as political uncertainty in Syria, and prospects of reduced stimulus from the Federal Reserve weigh on bullish prospects into the end of the year. The S&P 500 is lower by roughly 3% for the month and any rallies seen in the short term are likely to be met with active selling pressure. Next week, we will have employment numbers in the form of the August Non Farm Payrolls report and this will be highly important in terms of its implications for Fed tapering speculation. A weaker number could actually have a positive impact on stocks, as it will lead some sections of the market to believe that the Fed will not be in a position to immediately reduce stimulus programs.
The S&P 500 continues to hold near the lows, with very little seen in the way of upside momentum. The latest important support break was seen at 1630, and this now puts the focus on the downside for the next few weeks. First resistance to use as a basis for sell positions can be seen at 1665.
The FTSE 100 has a negative close last week but we are still holding above important support levels at 6360. Short term bias remains cautiously bullish above this level but bearish breakout strategies can be enacted if we see an hourly close below 6360. First resistance can now be seen at 6490.
The DAX is now giving back its position as one of the best performing stock indices, with prices closing below important support levels last week. The last big bearish break came at 8230, and this forcefully sent prices into the low 8100s. Bias is now bearish for the index (especially for longer term positions) but it makes sense to wait for some upside corrections before getting back into short positions.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.