Stocks Rally to New Highs after Fed Surprise
Stock markets experienced periods of erratic trading last week, as most investors were reluctant to enter into new positions before the all-important monetary policy meeting at the US Federal Reserve. This created an environment where stock values (in all major markets) traded mostly flat until the final results were announced on Wednesday. The Fed decided to surprise investor expectations and leave its monetary policy programs on hold at their current levels — essentially making the choice to hold off on “tapering” until, at least, its October meeting.
A majority of market analysts were looking for the Fed to announce a $10 billion cut back in its monthly asset purchase programs (currently valued at $85 billion). But, when this did not occur, the US Dollar plummeted and the S&P 500 rallied to new all-time highs. This week’s actions by the Fed suggest that the US central bank believes the economy is not ready to start running on its own (without the added help of monetary stimulus). This is a positive for equity markets but a negative for currency values.
But the next question spread betting investors should be asking is whether or not the rallies created by changing expectations is truly sustainable. Much more likely is the possibility that the latest stock push to record highs is a knee jerk reaction to the Fed’s surprise move. Toward the end of the week, we actually had voting members of the FOMC talking about the possibility of announced plans to taper at the October meeting, which would suggest that there will only be a mon-month delay in the tightening of policy. If we see additional members of the FOMC come forward with similar opinions, we could easily see major declines in stocks and a big surge in the US Dollar as we head into next month.
The S&P 500 saw some violent spikes higher into the middle of the week, with prices rallying to new records in the 1730 region. Prices experienced a steady short term drop lower from there but the initial impulse move is important from a chart perspective and the bias remains bullish as long as we hold above 1705, which was the initial breakout point.
The FTSE 100 tracked the price action in the S&P, with prices spiking higher midweek. From a breakout perspective, the main area to watch is at 6580 and long positions can be taken in that region, with stops just below.
The DAX closed the week trading into important short term support, so it is likely we will see a downside break in next week’s early sessions. Look to sell the DAX on a break below 8660, as this suggests that the medium term momentum has run its course and that we are in for a period of sideways consolidation, at the very least. Resistance rests at 8760.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.