By John Nyaradi
Dr. Ben Bernanke, the Federal Reserve and the German Constitutional Court follow Mario Draghi to center stage
Last week was all about Mario Draghi and the European Central Bank stepping up to buy bonds in an attempt to defuse Europe's ongoing debt crisis. The action electrified markets and now market players turn to Wednesday's ruling by Germany's high court and Thursday's FOMC meeting and Bernanke's press conference.
On My ETF Radar
Chart courtesy of StockCharts.com
In the chart of the S&P 500 (NYSEARCA:SPY) we can see how the index blasted through all near-term resistance levels to log an "ascending triple top breakout" on August 7th. This is a very powerful buy signal and would point to still higher prices ahead. Near-term support is at the 1340-1360 level and a descent below this level and the blue bullish support line would indicate the end of this current rally.
Point and figure charting methodology points to an upside target of 1550 on the S&P 500, approximately 7.9% above current SPY levels.
Standing on The Economic Summit
U.S. stocks and ETFs hit multi-year highs last week, going as far back as December, 2007, for the Dow Jones Industrial Average (NYSEARCA:DIA) and January, 2008, for the S&P 500.
For the week the S&P 500 (SPY) jumped 2.2%, the Nasdaq 100 (NASDAQ:QQQ) climbed 1.9% (its highest closing level since November, 2000) and the Russell 2000 (NYSEARCA:IWM) soared 3.7%, a 116% gain from its February, 2009 closing low.
Gold (NYSEARCA:GLD) remains in strong rally mode, up 2.7% for the week and 12.8% from its mid-May low.
Economic reports were mixed with August Non Farm Payrolls disappointing with a missed estimate and new jobs declining to a mediocre 96,000 for the month. That's down from 141,000 in July. However, the monthly unemployment rate declined to 8.1% from last month's 8.3%, but this was mixed news as 368,000 people stopped looking for jobs and so are no longer counted.
News from Europe was relatively more positive with gains in German and British industrial production.
So now we look ahead to next week and the pivotal events on Wednesday and Thursday. If the German Constitutional Court nixes Germany's involvement in the European Stability Mechanism, this will be a major bucket of cold water on global financial markets as Germany's participation is key to the success of the European rescue fund.
The second big event is the FOMC meeting on Wednesday and Thursday which includes the Committee's statement and Dr. Bernanke's press conference on Thursday. Thursday holds the potential for high drama as more quantitative easing is widely expected and any disappointment here could likely trigger a sharp sell off in global risk assets.
Major economic reports are also on deck with weekly jobless claims on Thursday and Friday brings potential market movers with Retail Sales, Industrial Production and University of Michigan consumer sentiment.
So is this rally real or is it a "central banker bubble" that will soon explode and leave egg on their faces and blood on the floors of global stock exchanges. Can the current rally be maintained or is it built on smoke and mirrors from global central bank action? Of course, no one can say for sure. However, significant fundamental headwinds like a global economic slowdown and the approaching "fiscal cliff" pose risks, along with the fact that nothing has really been fixed in Europe with this week's ECB action, that only bought the region more time.
Bottom line: Financial markets around the world are in frenzied rally mode which could either go on to challenge all time highs in U.S. stock indexes and ETFs, or suddenly deflate if the forces of recession and the current global economic slowdown overwhelm even the power of the Dr. Bernanke and Mario Draghi.
This week will put Dr. Bernanke on center stage; the highest probability is that he will buy bonds, either U.S. Treasuries, mortgages or both. If he does, expect stocks to go higher, along with precious metals and commodities. However, if he turns out to be full of hot air, we will probably hear loud hissing from the global financial bubble that has recently been inflated. Technical indicators and central bank action point to higher prices ahead as we face a situation where "don't fight the Fed" has become a global tidal wave of easy money.
Disclosure: Wall Street Sector Selector holds a position in (IWM) actively trades a wide range of exchange traded funds an positions can change at any time.