By: Costas Bocelli — September 5, 2013
2 Things You Must Watch This Month
August was a tough month for the bulls. And even though the S&P 500 suffered its worst monthly loss since May of 2012, the 3.1% decline in the index otherwise felt more like a slow leak than anything else. Having just come off fresh record highs just four weeks ago certainly helped to numb the pain during the current pullback.
That’s the good news.
But the not so good news is that we’ve turned the calendar to September, which doesn’t exactly have a very good track record if you’re rooting for stocks to move higher.
And this time around, the bulls will be especially challenged as there’s plenty to worry about over the coming four weeks.
The US fiscal budget will need to be approved, as the current one expires at the end of the month. Without a new budget or another stop-gap continuing resolution bill, the government could be forced to shut down.
Across the pond, the Germans go to the polls on September 22 and the election results could have a profound impact on how the Eurozone superpower manages the next flare-up in the sovereign debt crisis.
The markets must also contend with the prospect of a reduction in stimulus being pumped into the financial system by the Federal Reserve. The Fed’s next policy statement will be released on September 18, and many analysts are expecting some tapering measure to be announced at the upcoming meeting.
And finally, we’re now engulfed in a geo-political and military situation surrounding the ongoing developments in Syria. The outlook still remains muddled, but the current projection is that the United States Congress will debate and vote for the use of military force against the Syrian government over the alleged use of chemical weapons as early as next week.
That’s a pretty full slate of market moving catalysts, which should keep the news wire tape scrolling at a brisk pace all month long.
And it also comes at a time when the major averages are treading along very vulnerable levels of support that could easily turn the current pullback into something far more severe in the weeks to come.
Referring back to the S&P 500, the index is once again trying to stabilize after recently dipping below the 50-day moving average. The moving average has been a reliable area of support for the bulls all year long, and this month may be the toughest test yet.
Two things You Need to Watch Right Now
If you’re thinking how in the world to follow every twist and turn through so many events, don’t worry. I know it can be overwhelming to navigate through a period that will be loaded with uncertainty and likely to be tumultuous.
And I definitely get that.
So we’re going to condense it down and focus on two easy-to-follow indicators that should help you get a better grip on market sentiment.
You see, there are two things that need to stay in-check as these events play out. And, if they do, then we should indeed be in the midst of yet another market bottom and another push to record highs may soon be upon us between now and year-end.
Here’s all you need to follow with regard to the situation in Syria...
The writing is on the wall that a military strike against Syria is coming. The only question that remains is which countries will muster the political will to join the United States in the operation. The wild card is actually the aftermath and the extent of the collateral damage that may follow after the strike.
The thing to fixate on is the price of oil. You see, oil prices will tell the entire story, and if they should happen to go parabolic and remain there for more than three trading days, then the market is going to have a real problem on its hands.
It’s as simple as that. Ignore everything else and focus on oil prices as the Syrian situation plays out. Oil at $140 or higher for a prolonged period will be bad news for the stock market.
The world may have a “redline” against the use of chemical weapons, but the stock market’s “redline” is spiking oil prices...
Don’t Worry About All the Taper Talk
As we move towards the FOMC meeting in two weeks, everyone is going to be fixated on the Fed’s intentions on reducing its monthly asset purchases.
Even if the committee does signal that it will begin to taper its monthly asset purchases, don’t pay any attention to anything other than the yields on the longer-dated US Treasury bonds.
That will tell the whole story, because where yields go after the Fed policy statement should be the clue as to where the stock market may be headed.
You see, yields have been steadily rising on the Ten-year Treasury bond, which is most sensitive to consumer financing and the cost of corporate capital. The recent rise in yields has been a direct drag on the housing recovery and could undermine the recent momentum that the Fed has created through its monetary policy.
And while the Fed does want to begin unwinding its QE program, what it does not want is longer-term interest rates rising too quickly before achieving its labor market targets, which are still projected as being two years out into 2015.
So, pay attention to the Ten-year US Treasury yield.
The yield is scraping up against two-year highs at 2.90% and very close to the psychological level of 3.00%. If yields spike above 3.00% and remain there for three trading days, then the stock market is not going to take it very well.
Taper or no taper, the path of longer-dated treasury yields will tell the story as the month progresses.
September is shaping up to be one of the most pivotal months of the year.
And while there are multiple events playing out simultaneously, all of which will surely confuse the average retail investor, paying close attention to oil prices and longer-term interest rates should smooth out much of the noise and help you get a clearer grasp of the market landscape.