Will Storms Shock September’s Stock Market?

With several red letter days just ahead in September, the month will be one to remember for global stock markets and ETFs.

Summer drew to a close this week on light volume and market hopes for more easing generated by Dr. Bernanke’s speech in Jackson Hole.  Now vacations are over, kids are back in school, and September will be a pivotal month for global financial markets.

On My ETF Radar

S&P 500, NYSEARCA:SPY, SPDR S&P 500 ETF

In the chart of the S&P 500 (NYSEARCA:SPY) above, we can see how the S&P 500 (NYSEARCA:SPY) remains stuck in neutral between resistance levels at 1420 and support a 1340.  The S&P 500 (NYSEARCA:SPY) remains on a “buy” signal and in bull market configuration above its blue bullish support line and with an upside target of 1550.

View From The Summit: Global Stocks and ETFs Look to September

The pattern we see above is likely to be resolved, one way or other with the “red letter” days coming up in the first part of September.

Key dates include:

September 6th:  The European Central Bank meets in Frankfurt.  Global stock markets and ETFs expect ECB President Mario Draghi to come through on his pledge to do whatever it takes to save the Euro (NYSEARCA:FXE) Market participants expect more central bank bond buying as the situation in Spain continues to deteriorate.  European bond yields have been generally falling as markets expect the ECB to deliver on its promises.

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September 7th: The August Non Farm Payrolls and Unemployment Reports for the United States are released.  Strength or weakness here will be carefully watched as this data will be a key ingredient in any potential further action towards monetary easing by the U.S. Federal Reserve.

September 12th: The German Constitutional Court rules on the constitutionality and legality of the proposed European Stability Mechanism, the permanent bailout fund proposed for the European region.  This will be a SIGNIFICANT decision as the fund is a pivotal ingredient to the possible resolution of the European debt crisis and is widely thought to be unworkable without Germany’s participation.

September 12-13th: The U.S. Federal Reserve meets to determine further action regarding quantitative easing which is widely being expected by global markets and U.S. stocks and exchange traded funds.  Any disappointment here will be seen as being negative for stocks and ETFs.

Seasonality also plays a factor in September as the month is typically the worst performing month of the year for U.S. stock indexes.  Since 1928, September has recorded more down months than any other month and also holds the record for the worst monthly drop in history which came in September, 1931, when the Dow lost -30%.  Septembers can be an “up” month, but the percentage of positive Septembers is the lowest of any month on the calendar.

So it’s easy to see how and why these “red letter” days will make September a month to remember and will determine if stock and ETF prices are “red” or “green.” 

Stock Market and ETF Review

August delivered the third straight months of gains for U.S. stock markets and the ETFs that follow them as market participants banked on more help from the Federal Reserve and European Central Bank in view of significant fundamental economic headwinds.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) lost 0.5% but gained 0.6% for the month of August.

The S&P 500 (NYSEARCA:SPY) added 2% in August and declined 0.3% for the last week of the month.

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The Nasdaq (NYSEARCA:QQQ) gained 4.3% in August and was flat for the week.

The Russell 2000 (NYSEARCA:IWM) added 5.3% for the month and 0.5% for the week.

August volume was the lowest in five years as investors and major players took vacations and waited for September’s news.

Last week’s big news was Dr. Bernanke’s speech in Jackson Hole where he moved ever closer to more quantitative easing, most likely to be announced at the September meeting.  U.S factory orders rose in July and the University of Michigan consumer sentiment index beat expectations.  Things also look brighter in the housing industry with a strong pending home sales report and positive Case/Shiller House Price Index report.

On Monday, while U.S. markets were closed, the European purchasing manager’s index registered a reading of 45.1, solidly in contraction territory and below initial estimates as Europe slides towards recession.  China reported similar results with its PMI declining the most in three years to a reading of  49.2, also slipping into the contraction zone.

The week ahead brings significant economic news in addition to the pivotal European Central Bank meeting.  Tuesday brings August ISM and July Construction, Wednesday sees 2Q productivity and labor costs, Thursday highlights ADP Employment, weekly jobless claims and Non Manufacturing ISM, and Friday is the big day with August Non Farm Payrolls and Unemployment.

Bottom line: Global stock market and ETF investors look to U.S. and European central bankers for further easing to offset a slowing global economy and European debt problems.  Fundamental headwinds remain strong while technical indicators point to a bull market now at significant resistance levels. Watch the calendar for September’s red letter days which will set market direction going into autumn.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.