Lazy Days of Summer and Central Bankers

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I concluded my write up last week with this, “Headlines coming from Europe or our Fed can have a major impact on the market. In the past few years efforts by central bankers have become more coordinated and centralized. Coordinated action, or the lack thereof, from the world’s central bankers can play a major role in near term market movements.” We received some headlines last week that moved stocks higher on Friday. The rumor that ECB was considering setting up yield band targets under the new bond buying program caused markets to ramp. CNBC is now reporting that Bernanke headlines are causing the pop; Bernanke said that there was room for further action by the Fed in response to questions from Rep Issa. Those were the comments that brought the buyers in on Friday.

There was a negative divergence last Tuesday. The market attempted to rally and breakout above near term resistance. The S&P 500 moved above the 1424 level early in trading on Tuesday. The other indexes did not confirm this move. Later in the day the S&P fell below resistance and became a false breakout. This action led to some selling until Friday morning. The Dow actually closed below its near term support level Thursday. When the other indexes did not confirm the move lower in the Dow a positive divergence was developing. Then we received the news from Europe on leaders buying bonds and the market rallied Friday afternoon. 

There was not really much change in the technical picture last week. 64% of the stocks in the S&P 500 remain in strong shape technically and 54% of smaller stocks are in basing or advancing patterns. Short term resistance for the S&P 500/Dow/NASDAQ/Russell 2000 is 1428/13,340/3136/828. Short term support for the major indexes is 1394/13,000/2998/798.

Ben Bernanke will speak at Jackson Hole on Friday of this week and the Europeans are getting together on September 6. Central banker actions are large and coordinated these days. So, while we are entering a typically slow week prior to the holiday weekend, we must be on the lookout for headlines regarding our Fed and the central banks throughout the world. There is not a lot on the earnings front or other areas that can impact the market. The central bankers are the major swing factor here. How the market reacts to the comments from them will be a large determinant for how we do near term.

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About Thomas J Smith CFA