Stocks Higher as Markets Ease Tapering Forecasts
Stock markets saw some interesting developments last week, as weaker economic data was actually interpreted as a positive by investors, and the S&P 500 had one of its best trading weeks since January. This should probably sound contradictory or impossible to many new investors but the fact is that markets are preparing for major changes in monetary policy at the US Federal Reserve. When investors see stronger economic data, there is an increased possibility that the Fed will begin removing quantitative easing stimulus at a faster rate. This would be a negative for stock markets if this were to occur.
For these reasons, disappointing jobless numbers released last week actually helped calm some of the selling pressure that has been a marked indicator since the latter half of the summer. The main event will come on Sept. 17-18, which is when the Federal Open Market Committee (FOMC) will conduct its monthly meeting. At its conclusion, the Fed with either announce no changes in its monthly asset purchases (currently at $85 billion each month), or a likely reduction of $10 billion. The latter option is what is expected by a majority of the market, so anything larger than this will weigh more heavily on stock valuations.
At this stage, spread betting traders would be in a better position to simply wait for the conclusion of the meeting before committing to any large positions. If the Fed indicates a willingness to continue pumping stimulus into the economy, we will likely see stocks rally to new highs for the year. If the reverse is true (and the Fed s prepared to start removing stimulus), stock values could have a tough time gaining bullish traction in the fourth quarter. Next week will be pivotal in determining sentiment for the remainder of this year.
The S&P 500 continues to push higher after bouncing from 50% Fib support at 1625. This is now the key level to watch below, as any downside break will likely accelerate losses. To the topside, major resistance is now seen at the all-time highs at 1705. Short term sell positions can be taken at this level.
The FTSE 100 closed position on the week, after breaking through critical 61.8% Fib resistance on the daily charts. We still have historical resistance at 6660, however, and it would be wise to hold off on long positions until we see a daily close above this level.
The DAX is one of the week’s strongest performers but we have still yet to clear major historical resistance in the 8520 region. Prices are hovering just below this level, with no major selling seen so we will most likely clear this level next week. Buy a break of 8520, or wait for a drop to support at 8440 to use as a basis for shorter term contrarian positions.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.