Over the next several weeks, given the developments at the European Central Bank (ECB) and the U.S. Federal Reserve, traders should take stocks higher. A look at the three-month chart shows the impact of deteriorating economic data globally, but daily action indicates trader interest and hope in further central bank assistance. Therefore, heading into what looks like a likely issuance of new quantitative easing from the American central bank and supportive bond purchases from the Europeans, the next several weeks of trading have support.
The 3-month chart of the SPDR S&P 500 Index ETF (SPY) shows a flattening of a longer-term bullish trend. However, the choppiness in between has mostly been driven by speculation about ECB and U.S. Fed policy action to support. The clearest example of this came when ECB President Mario Draghi strongly stated the ECB would support the euro in late July. That set European stocks on fire, and it came at a time when the region needed some sort of catalyst.
The iShares S&P Europe 350 Index is up 6.3% since that fateful day. Unfortunately, as time passed, the market began to see that Draghi's words may not carry with them the will of the eurozone. Bundesbank President Jens Weidmann remains as a key objector, and German Chancellor Angela Merkel declared Germany's objection to Draghi's plan today.
The details of the plan are leaking out, but it is expected to be formally presented tomorrow, September 6, 2012. It is thought that the ECB will purchase sovereign short-term bonds of terms of one to three years. While unlimited, those purchases are expected to be offset by sales elsewhere in the system in order to sterilize their impact to euro money supply. That would address my concerns that the central banks of the world, plus factors not yet incorporated into consensus thinking, threaten to make fiat currency worth significantly less over time. Because of the rumored construct of this plan, and assuming it would be approved, the action would ease concerns about the region's chances of experiencing full recovery. This should lend more support for stocks globally, with a focus on Europe.
Federal Reserve Chairman Bernanke's Jackson Hole speech last weekend left most market participants (as I see it) feeling more comfortable about the prospect of Fed action in September. I don't think the rumblings from the GOP convention about Bernanke not being extended an invitation to stay under a Romney administration will serve to keep the independent Federal Reserve from acting in favor of markets and the economy in September. If I was told I would lose my job under certain circumstances, I'm not sure political perception would matter any longer in my decision making. Bernanke has all the more reason to act now in September.
The latest economic data reported yesterday, showing the ISM Manufacturing Index contracted deeper into the red, only demands further action from those who can so flail. The Dow Jones Industrials took a hit on the economic news, but would find support with central bank action as depicted here. The Dow Jones Industrial Average ETF (DIA) is higher this morning, after a rough time of it yesterday, and that is likely a sign of what's to come over the forward few weeks. Hard hit industrial stocks like Caterpillar (CAT), General Electric (GE) and Deere (DE), which fell yesterday, are strongly higher today, I believe, on this prospect. So, while the market is lazily returning to its regular speed, you might have an opportunity to set short short-term long bets today. I qualify the buy recommendation to the short short-term, because I see economic results only deteriorating after the central banks act.