Here's a weekly chart of the S&P 500 from the March 2009 bottom:
The S&P cracked the 2000 level for the first time this week on light pre-holiday volume and I expect it to maintain these levels and possibly move higher on light volume next week as many traders will stay in the Hamptons after Labor Day, not coming back until September 8th.
The daily chart of the S&P looks equally as strong although we are getting mixed signals on some of the momentum indicators I follow:
1. Ukraine? Outside of a commitment by the Obama administration to putting US troops on the ground (chances are absolutely zero) even a commitment of NATO troops to "maintain peace" is not going to cause any significant reverberations in financial markets.
2. A commitment of US troops to battle ISIS in Syria will not shake financial markets.
3. Deflationary pressures in the Euro zone can possibly have an economic impact on global economic growth but even here the outcome of a deflation scenario and it's impact on our market is uncertain. It must be remembered that we have been in an environment in which the one time second largest economy in the world, Japan, has been continually been dealing with deflation since its onset in 1990. Even "Abenomics", the conscious effort to create inflation in that country, is having at best, mixed results.
Euro zone deflationary pressures may also not be what they seem. The latest CPI (Consumer Price Inflation) report showed that the main drivers of the deflation were food and gas prices while core inflation remained unchanged. Now, the overall number is still extremely low and borders on deflation which is the result of extremely weak growth, especially in the peripheral economies of Spain and Italy. However, if the ECB (European Central Bank) implements QE (Quantitative Easing) next week as some expect, markets will rally as the Euro initially will rally driving the US Dollar lower.
I personally do not believe the ECB will act yet as there is considerable opposition from the Germans against any implementation of QE. All things being equal, Europe can still muddle along without much of an impact on our markets.
4. The biggest concern I have is the effect that rising interest rates will have on stocks once rates start to rise in earnest. The Fed is projected to start raising short term rates in June, 2015 although some on the street believe this will happen sooner. The "short end" of the yield curve is already backing up in anticipation of this eventuality but the long end ( longer dated maturity bonds) are rallying for the reasons I cited above which is causing a flattening of the entire yield curve. However, I suspect this will change quickly when we get closer to the first official announcement by the Fed.
If long term rates start to back up quickly we will have a significant correction in equities. Don't misunderstand, I'm not calling for an "Armageddon scenario"; it's just that after 5 years of Fed manipulation of the markets there will be significant technical and psychological readjustments to the market.
Fed policy has driven many "yield hungry" investors into the market and once rates rise some of these investors will move back into more traditional interest bearing alternatives.
How and when this all shakes out is the big question for the market. If the market can gradually adjust to this Fed induced transition there may not be much of an effect. And admittedly, the first increase of short term rates will be insignificant in itself. It's how the rest of the yield curve, especially the long end (10 to 20 year maturities) react.
We will gather more clues on this quandary as time goes on but I don't see this having any significant effect on our markets in 2014. I can easily see the S&P at 2300 by the end of the year with perhaps a small correction in the interim.
Next week will be a big week for employment numbers with the culmination on Friday of the Monthly Employment Report. Fed Chair Janet Yellen has made the statement repeatedly that wage growth matters and the street will be scrutinizing the measure of hourly pay for production workers that the Fed monitors.
And, of course, events on Thursday in Europe will be watched as the ECB meets. Any decision to implement a "shock and awe" QE will be met with a global market rally. But I wouldn't expect it. Mario Draghi has his hands full politically with the Germans.
Have a great week!
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