David Morris

SEPTEMBER kicked off with impressive rallies on global equities. It was certainly a “risk on” start to the month and echoed the market moves that we saw back at the beginning of August. In fact, the S&P has already made back all its August losses and more. But last month’s initial strength, which saw the major US index break above its 100 and 200-day moving averages and seriously test resistance around 1,130, faded pretty quickly. Could we see this price action repeated?

This time around, we’ve begun from a lower base. While some positive data on Chinese and US manufacturing, Australian GDP and a surprising jump in US pending home sales provided excuses for buyers, the rally was largely technical. As if to underline this, the S&P made a beeline for its next major technical level – with resistance just above 1,100. Friday’s better-than-expected non-farm payrolls provided the impetus, but the momentum wasn’t strong enough for the S&P to reach full escape velocity.

And why should it? After all, the US is still losing jobs when it needs to add 125,000 per month just to accommodate new entrants to the workplace. Although there were positive revisions to June and July’s data, the news on private payrolls was mixed. There were 67,000 private sector jobs added from July to August, down from the 107,000 in the previous month.

Meanwhile, the ISM non-manufacturing PMI missed expectations. Gluskin Sheff economist David Rosenberg pointed out this discrepancy between the data: non-farm payrolls showed that the August increase in private sector employment was mostly in health and education (the service sector). Yet the ISM non-manufacturing survey showed that August services employment fell to 48.2 from 50.9 in July.

This week, the only significant US data are weekly unemployment claims and the trade balance on Thursday. If last month’s pattern does repeat, then the S&P should hit a brick wall of resistance at 1,130 with a subsequent sharp sell-off back to 1,040. The big
question for traders and investors alike is whether this month sees a break-out of this range or not.