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Summer is now officially over, at least from a business
sense. Kids are back in school, beach retreats are over, and we can expect to
see stock market volume return as traders get back to business.
Now, investors will ask themselves if the powerful rally
last week was just a last summer fling? Or was it the start of something more
meaningful?
The end of summer economic data showed some improvement.
Investors were wooed with better than expected employment data. New home
sales turned heads. And some proposed tax breaks may cool the summer’s heat
on small businesses.
But this morning, back-to-the-grind news from European banks
sits like the stack of papers on the desk that we’ve been trying to
ignore.
The WallStreet
Journal is reporting that Germany‘s 10 biggest banks may need to raise $135 billion in capital to meet
new requirements and offset potentially risky loans.
Of course, we new from the outset that the European bank
stress tests were far less stringent than the ones conducted here in
the U.S. And we weren’t
exactly convinced that the standards to which our banks were held were truly
realistic.
U.S. banks didn’t have much trouble
raising the cash needed to shore up their balance sheets. And I doubt the
European banks will have any difficulties. If there’s one thing of which we
can be sure: it’s that there’s plenty of liquidity available for asset
purchases of the terms are good.
Still, investors will be challenged to recover the spark
that drove stock prices higher last week. At least for a day or two…
Over thepast two
weeks, the S&P 500 repeatedly tested support at 1040. That set the stage
for last week, when the S&P 500 recovered several important resistance
points. 1085 may be the biggest one. But even Friday’s close above 1100 is
significant. And readers should also note that the S&P 500 moved above
its 50 day moving average.
Now, I would like to point out that technical levels like
1085 and 1100, as well as technical indicators like the 50-day moving average
are significant because investors believe they are significant.
In other words, if investors feel that a close above 1085,
or moving above the 50-day moving average is a sign that the stock market is
improving, then they are more likely to be buyers, and the stock market
improves.
Investor sentiment and confidence is a self-fulfilling
prophecy, as is much economic activity. Businesses hire when they are
confident there will be growth. Investors buy stocks when earnings growth
looks more certain.
So while 1085 may just be a number, don’t underestimate the
market’s ability to make that number mean something.
Oil appearsto be
selling off today, as do stock prices. But let’s remember that both assets,
as proxies for economic growth are moving within their established trading
ranges.
What’s more, both oil and stocks are within the lower third
of their trading ranges. The upside is more compelling than the downside. So,
if you didn’t pick up any stock when I gave the signal last Tuesday, the dip
that’s looming should be a good opportunity to get some exposure to a rally
that should take the S&P 500 at least 5% to 7% higher.
There is very little economic data on the ledger this week,
so it will be investor sentiment that drives prices.
As always, let me know what you’re thinking: [email protected].