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Earlier in the month, I made the case for a stalling scenario in the S&P 500, despite the close proximity to the Fed's September tapering deadline, which is widely expected to jar markets and increase price volatility in all of the major stock indices. So far, this expectation of sideways trading (with a modest downward bias) has been realized, and the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) is showing losses of roughly 3% for the month of August. Perhaps what has been most accurate about the projection has been the fact that even in the face of positive economic data, any attempts at rallies have been lackluster.

The latest example of this could be seen in the much stronger than expected GDP data out of the U.S., which showed that the world's largest economy grew at a rate of 2.5% for the second quarter. This is more than twice the rate of expansion seen during the first quarter and much higher than the 1.7% rate that was expected in early estimates. To be sure, markets did ease off pressuring prices to the downside, but at this stage it is clear that investors will need much more to shift bias into the bullish camp.

Reasons for Weakness

Reasons for weakness in SPY have come from both internal and external forces. Most recently, positives have been seen in collaborative discussions between Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD), helping support market sentiment and in Guess? Inc (NYSE:GES), which posted strong rallies on improved quarterly profits. On balance, however, the negatives have carried more weight. Market uncertainty has seen significant increases based on potential military conflicts in Syria. This is being viewed alongside the increased possibility that the Federal Reserve is prepared to start removing monetary stimulus -- a driving factor that has helped SPY rally nearly 155% from the lows seen in the beginning of 2009.

Policy changes that could be enacted in the next few weeks will completely change the market climate and signal an end to an historic period for the U.S. economy. Encouraging economic data (such as the latest GDP figures) can actually be viewed as negatives because of this, as stronger data supports the Fed's longer-term outlook for the rate of recovery into 2014. So even while potential military activities in Syria might represent nothing more than a short-term risk, it is clear that investors remain reluctant to commit to overly bullish positions and volume activity in equity markets as a whole suggest that a good section of the market is more than content staying on the sidelines until key event risks pass.

Going forward, volatility in the month of September could become erratic as the recurring issue of U.S. debt is revisited and the Federal Reserve is set on a path to commit to a more substantive policy bias in coming weeks. Investors should take note of September's stock performance, as this will be the best indication of the valuations we are likely to encounter into the end of this year. At this stage, markets are at an important crossroads as investors wait for the next driving impulse that takes the S&P out of its slower range trading environment.

SPY Chart Perspective

(click to enlarge)

Using a longer-term chart perspective (weekly charts) support levels in the SPY are clearly defined. A confluence of historical and Fibonacci support can be found in the 155.90 region, and any approach here should be viewed as a strong buying opportunity. This level marks the 23.6% fib retracement of the rally from below 108, and should contain prices into the end of the year. Resistance above is now seen at 167.

Source: S&P 500 Rallies Continue To Face Headwinds