S&P 500 and the ‘taper’: September 18 is upon us

by George Hatjoullis

S&P 500The S&P 500 has had a nice rally so far in September. It started the month on a support line and ‘neutral’ in terms of momentum. The rally was largely due to trading shorts being in place, the sudden outbreak of common sense in relation to Syria and more recently the withdrawal of Summers from the Federal Reserve Chair race. The market has priced in Yellen as Chairperson and hence a more dovish slant to Federal Reserve policy. The interesting thing is that ahead of the September 18 FOMC meeting, despite all these favourable winds, the S&P 500 has not been able to sustain a new high. The taper is still a concern.

The question is how will the S&P 500 respond to the FOMC statement that is issued tomorrow? The taper will start before year-end. It will most likely start tomorrow. There is market talk of how much. You would imagine there was little of substance left to surprise the market. Nevertheless, it is a safe bet that the S&P 500 will have moved a few percentage points from current levels by September 30. The risk is that it will move lower. Why?

First, there are seasonal forces that have been discussed in earlier blogs. These forces are less of an issue in a bull market, and this is a bull market. However, September is still a seasonally difficult month relative to other months. Second, the S&P 500 looks a touch overbought coming into the FOMC meeting. It is more sensitive to disappointment. Finally, the gap up following the Summers news has left market a little dislocated. A move lower to around 1650 is easy to envisage even on the way to new highs. A move below this level would open up a deeper correction, perhaps to circa 1570. However, even such a move would be consistent with a bull trend. A sustained move below 1570 might start to change the picture.

Of course, the FOMC minutes might come up with a bullish surprise but it seems unlikely. The taper is  now a given and the only issue is by how much. The market has slowly shifted from worrying about the withdrawal of liquidity to the relation of that withdrawal to what is going on in the economy, both domestic and global. The economic outlook is for steady growth, which is a comfortable backdrop. Moreover, the withdrawal of dollar liquidity is being partly offset by easier monetary conditions in the Japan and the eurozone. So long as common sense prevails in the geo-political domain, the environment for the S&P 500 looks set fair and the index should continue to trend up on cue from late October/November.