Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Obviously we had a resolution to a month long consolidation last Thursday with the ECB signaling a bond buying program is on the table, and it just awaits for Spain (and perhaps Italy) to request aid. Much like early August, the S&P 500 had a large move early in the month so now it is is time to watch the nature of the digestion. August’s digestion was through time rather than price and was many weeks in the making. Now we will see what this month brings. As we can see on the S&P 500 chart (I am using the SPY ETF to show the gaps) we have 3 major gaps now in the S&P 500 in the 1340s, 1370s, and now from Thursday 1410s. It will be interesting to see what event is going to fill these gaps, especially the former two – but that is a discussion for down the road. In the near term holding the breakout level in the 1410s is the key for a sustained move. Some backing and filling is reasonable here – the key is not to see the crazy volatility of June and July.
One sector to point out of strength is the financials – this was led by Goldman Sachs (surprise surprise) the day ahead of the rest of the group last Wednesday, and then a powerful push by most of the major names Thursday and Friday.
Friday we saw a lot of rotation into laggard groups based on the Chinese infrastructure program news. Again to repeat this is a SIX YEAR program, but investors are very knee jerk based on headlines. It will be important for these pro cyclical groups to contribute for a sustained move – recall they rallied sharply for about 10 days in late July, early August then fell apart. That said the fundamentals in the group are not striking as we have had warnings just last week from both Intel and Fedex – so continue to watch if central bank liquidity trumps reality on the ground.
Obviously the key event of the week is the FOMC announcement and press conference Thursday. Expectations is for the minimum push out until sometime in 2015 from 2014 for ‘exceptionally low rates’ language with some mixed thoughts on additional QE. It seems based on the language in the minutes from the last meeting the labor market data would point to it happening . Looks like at the rate it is going, the call for no rate hike until 2018 is becoming more likely! [May 19, 2011: Prepare for a Rate Hike…. in 2018. So Says Goldman Sachs] In Europe, Germany’s Constitutional Court will rule if the ESM is constitutional Wednesday morning premarket. In terms of economic data, retail sales Friday is the only major report as both CPI and PPI have been thrown to the wayside as there is no inflation data that will slow down the Fed’s actions it appears.
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