Stocks Struggle on Debt Impasse Possibilities
Stock markets traded under pressure into the close of last week as investors start to grapple with the possibility of further obstacles in the US Debt Ceiling debate. This sent the S&P 500 off of its monthly highs (and back below the 1700 mark) but this weakness was not isolated to developed markets. Equities tied to emerging markets were also lower, as the increased element of uncertainty has led to another bout of risk aversion (a typically negative scenario for emerging market stocks). In addition to this, the FTSE 100 experienced some softness after second quarter GDP figures disappointed market expectations at a lackluster 0.7%.
The S&P 500 has now seen declines in six of its last seven trading sessions, and last week’s performance was the worst since August. At this stage, the question spread betting traders should be asking is whether or not these declines are confirmed by the economic data. Given the recent improvements in areas like US jobless and GDP, the answer is a pretty clear “no.” So, how should traders be positioning themselves? If what we are truly seeing here is a knee-jerk reaction to short term changes in sentiment, then any declines in world equities markets should be viewed as a buying opportunity.
We will have some key event risks into the latter part of October, however, and this could keep stock markets under pressure for the next few weeks. Best idea here is to wait for dips and then establish longer term positions as this weakness in stock markets is likely to turn around before the end of the year.
The S&P 500 met selling into the close last week, and it is starting to look like we have a head and shoulders pattern forming on a one month time horizon. This suggests continued weakness in the coming weeks but short term traders can take buy positions into support at 1680, anticipating a bounce before hitting resistance at 1795. A downside break of 1680 targets 1660.
The FTSE 100 is now trading well off of its 52-week highs and without any meaningful support nearby, it looks like we can expect another bearish performance next week. Prices closed just above 6510 but we will need to see a drop back into strong support at 6440 before we can reasonably expect to get bullish on the FTSE once again. Resistance overhead is now seen at 6560.
The DAX did not fare as badly as the other major indices last week, trading mostly sideways into the close. The main question here is whether this is the “calm before storm” and likely to see a big drop lower. If this is the case, we will first see a break of support in the 8620 region, and if this occurs expect the losses to accelerate. Sell the DAX using breakout strategies below this support level.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.