S&P 500 Index: Make It Or Break It?

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Includes: EU, FXE, SPY, UDN, UUP
by: Angelo Airaghi

Ben Bernanke is anticipating another round of measures to support the economy. These measures could help stocks and gold until the year's end. The U.S. dollar should instead contract. However, failure to move above 1.2670 would take the euro back to 1.24/1.22.

Unemployment is on focus

According to the minutes of the Federal Open Market Committee (FOMC) meeting on the 31st of July and 1st of August, the members apparently agreed on the need for additional measures, unless the forthcoming economic data show important improvements. In effect, the Fed still has a few options available, starting by simply postponing the easing bias until 2015. However, very bad employment numbers on September 7 are certain to elicit calls for a bold decision such as quantitative easing (QE3) or using an asset purchase programme called QEX. This would require mortgage-backed securities (MBS) and the terms would be at the discretion of the committee. Next week's data will be critical. The Institute for Supply Management's (ISM) manufacturing and non-manufacturing indices will be watched closely as well. The S&P 500 index could target 1450-1500 by year's end. The short-medium trend is still bullish. Seasonally, the last two months of the year support an increase of stocks.

On the other hand, September has traditionally been the worst month. As a result, a break-out failure above 1430 might set a decline to 1370. The index is meeting a series of resistance lines on the weekly chart such as: the higher Bollinger Band and the higher channel line. Last Friday, Chairman Bernanke confirmed more easing is coming. The economy has been moving sideways for months, as shown by the "Beige Book" published in the middle of the week. The GDP is below 2.0%. Internal and foreign demand is weak. The real estate market is bottoming, but there is not much money left to buy new properties. American household wealth is not improving. According to the Conference Board survey for August, confidence has declined by 5 points to 60.6. Worst of all, perceptions about job availability have continued to fall. Nonfarm payrolls were below 125,000 from May to July. At 8.3%, the unemployment rate is at the highest level since last year. There is, nonetheless, a flicker of hope. Before resuming the uptrend, unemployment could decline to 8.0%-7.5%, according to the study of cycles.

Mario, what is the plan?

A weak European economy does not help. A recession is unfolding and the European Central Bank (ECB) could cut rates by 25 basis points to 50 on Thursday. However, the German DAX index rose about 10% during the summer. Spreads in Spain and Italy have contracted. Interest rates on the two-year financial markets dropped below 5% and 6% respectively. They are now approaching comfortable levels at 2.75% to 3.25%. ECB President Draghi said the central bank would "do everything necessary to save the euro." Expectations are mounting, but details are still missing. Will these be revealed during the Governing Council meeting on 6th of September?

Time is again running out. Confidence is deteriorating in the Eurozone. According to the Economic Sentiment Indicator (ESI), published by the European Commission, confidence is at the lowest level since July 2009. Spain and Italy were severely beaten, but Germany is beginning to feel the heat as well. In August, the IFO (Institute for Economic Research) business climate index fell for the fourth consecutive month and reached the lowest level since February 2010. The important IFO expectations index fell below the long-term average. Both the retail and manufacturing sectors are suffering from the economic recession. The euro remains well supported, as most of the bad news is already discounted in current prices. However, a breakout above 1.2670 is necessary for a level of 1.29/1.30. A failure to close above these levels could set a decline to 1.24/1.22.

Disclosure:

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.