By Kevin Grewal, Editorial Director at www.SmartStops.net
Since March 9, the S&P 500 has jumped 52% and has left the equity benchmark index valued at nearly 19 times the profits of its companies. Historically, the month of September is no friend to the equity markets and many believe that history will not be broken.
On the positive side, there have been a few economic indicators suggesting that the economy is recovering, which traditionally gives a boost to the markets. The Institute of Supply Chain Management reported that its index for measuring manufacturing activity rose to a 52.9 in August, indicating that expansion took place last month. Additionally, the real estate sector is showing signs that it may have hit a bottom. The National Association of Realtors stated that its seasonally adjusted index of sales contracts for previously occupied homes signed in July rose 3.2% to its highest level in the past two years. To add icing to the cake, construction of new homes and apartments rose 2.3% in July.
Although this is encouraging news, there are more signs suggesting that the markets will cool-off. In the real estate sector, many suggest that the recent boom has been fueled by the government’s $8,000 first home-buyer tax credit and historically low mortgage rates and can’t be sustained when the tax credits expire and interest rates start creeping up. Additionally, many believe that there will be a point of saturation, where buyers who qualify for mortgages will eventually run out. After all, one needs a stable job history and the ability to prove sources of income to obtain a mortgage loan; until unemployment levels stabilize and start improving this will remain a challenge for the sector.
To add to the worries, the Commerce Department reported that commercial construction spending sank 1% in July, and it is the growth of businesses which will fuel a sustainable recovery.
Next, investors seem to be wary of the health of the financial sector as many are fearful that banks will continue to post losses and shares of insurers have risen too far. Additionally, there have been rumors that the federal government will reduce its support of bailed out insurers, like American International Group (NYSE:AIG).
Lastly, some believe that the U.S. equity market was piggy-backing on the Chinese markets, as the Chinese buying spree lifted all global markets. With the Shanghai Index down nearly 25% from its recent peak, it is believed that the U.S. markets are going to follow.
The fundamentals are just not favorable, after all the U.S. markets are at their most expensive level since June 2004. Below are the uptrends seen in the broad-based U.S. equity markets:
The SPDRs (NYSEARCA:SPY) is up 50% from its $68.11 close on March 9 to close at $102.46 on Monday
The DIAMONDS Trust Series 1 (NYSEARCA:DIA), closed at $95.05 on Monday, up 45% from its March 9 close of $65.44
The PowerShares QQQ (QQQQ) closing at $40.03 on Monday after a March 9 close of $25.74, an increase of 56%.
When investing inequities, it is important to keep in mind the inherent risks involved and a good way to minimize these risks is through the use of an exit strategy. According to the latest data at www.SmartStops.net, an uptrend in the previously mentioned ETFs could potentially come to an end at the following price levels: SPY at $98.73; DIA at $91.88; QQQQ at $38.68. Keep in mind that these price levels change daily and updated data can be found at www.SmartStops.net.