Stocks Higher on Possible
Stock markets started last Monday with the bears in control and the S&P 500 traded under pressure into the middle parts of last week as investors continued to deal with the potential volatile discussion surrounding the US Debt Ceiling. These trends reversed during the Wednesday session, however, as statements from both side of the government (Republicans and Democrats) indicated that a potential resolution is closer than previously expected.
A resolution (sooner rather than later) is what the market needs to reach new highs in equity valuations, so as long as there is no real indication that these compromises will be obstructed, the path is essentially clear for new yearly highs in global stock markets. The main buzzword here is “uncertainty,” and if policy makers in the US fail to actually reach a compromise (and raise the debt ceiling), this would trigger credit defaults that would have a widespread negative effect on global markets. This uncertainty an event like this would cause would be difficult to quantify, and the inability for investors to know exactly when this issue will be removed from the market’s purview
But the latest media interviews have pointed to an attempt from both sides to finalize the needed legislation, and this led to single-day rallies in the S&P 500 of more than 2%. Assuming these comments are reflective of an actual movement to restore the government and avoid default, investors will then be forced to turn their attention back to the underlying fundamentals and the overall effect the data recovery will have on plans at the Federal Reserve to start removing quantitative easing stimulus.
The S&P 500 met selling pressure at the beginning of last week, before posting a very strong reversal on Wednesday, after hitting support just below 1650. This area now marks the main area of support and the overall bias for the S&P will remain bullish as long as this price zone remains intact. First resistance is now see at 1705, an upside break should accelerate upside momentum.
The FTSE 100 started the week with range bound conditions dominating until prices bounced forcefully off of support in the 6350 region. This is encouraging for the index but we will need to see a break of resistance at 6610 in order to fully confirm the bias. Until then, look to trade the 6350-6610 range — buying when prices drop to the low 6400s and selling as the index approaches 6600.
The DAX posted price activity that was very similar to what was seen in the FTSE, with DAX valuations rallying to 8720 and closing at the highs for the week. The momentum here is undeniable, but traders should wait for corrective dips before looking to re-enter the uptrend with new long positions. First support can be found at 8620, and spread betting traders should wait for a test of this level before buying.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.