David Morris
AT THE beginning of last week, investors appeared to have regained their risk appetite. Although trading volumes were light, equities continued their recovery following the sharp sell-off in early August. As we approached month-end, buyers appeared confident that a near-term bottom for the major stock indices was in place. Yet most economic data releases continued to indicate that a slowdown was in progress, and analysts were still busy downgrading their outlooks for global growth.

But investors weren’t put off by bad news; in fact, quite the contrary. Fed Chairman Ben Bernanke teased market participants by announcing that the September FOMC meeting would be extended over two days. This was interpreted as meaning that additional quantitative easing was on the cards, a view reinforced after the minutes of the August FOMC meeting were released. These revealed that some members believed that further stimulus was already overdue, and this news had investors heading back into stocks.

Friday saw the release of a truly awful US non-farm payroll number, and this time the sell-off in equities was not only pronounced but prolonged. Bad jobs data should bolster the case for further Fed intervention more than anything else, but this time no one was rushing to buy.

Technical analysts are watching the price action on the S&P 500 very closely. Last week’s rally came to an abrupt end as the index tested resistance at 1,228 on an intra-day basis. This marks the 50 per cent retracement of the most recent decline from May to August this year. Since then, prices have fallen sharply, and Friday’s slump saw the S&P test significant support at 1,172 - the 50 per cent retracement of the multi-year rally from March 2003 to October 2007. This level was breached yesterday on electronic trading of US stock index futures. But the main US exchanges were closed for the Labor Day holiday. Consequently, stock market bulls are hoping that investors will pile back in on the long side, just as they did in August. But sentiment is turning negative, and a growing number of investors are losing confidence in policymakers and central bankers. Many doubt that more quantitative easing will do anything to solve the chronic issues at the heart of this financial crisis.