THE third quarter proved to be pretty grim for stock investors. Over the past three months the Dow lost 14 per cent, the NASDAQ fell 10 per cent, while the S&P 500 ended 16 per cent lower. It wasn’t just the US indices that took a hit. The UK’s FTSE 100 dropped 16 per cent, while the German Dax finished down 26 per cent. Investors were forced to face up to lower global growth projections, the prospect of sovereign default in Europe and political dithering as policymakers continue to paint themselves into a corner.
Hopes are high that the fourth quarter will bring a rally. In a Thomson Reuters survey released last week, most analysts who responded anticipate higher stock prices as 2011 closes out. That may be so, although in the absence of additional central bank stimulus measures, and without a clear resolution to the European debt crisis, it’s difficult to get too bullish. But whatever happens, it seems reasonable to expect a continuation of the big intra-day moves that we’ve seen over the last few weeks. These will offer some excellent trading opportunities, but will also make for a nerve-wracking time.
From a technical perspective, if the S&P breaks below 1,126 then the August low of 1,080 becomes a target. However, if the index manages to rally from current levels we could see a move back up to 1,170 and possibly 1,200 in short order. The FTSE 100 appears capped around 5,400 with support at 4,960. A significant break below here makes a fall to 4,800 likely.
There’s plenty of European news to consider this week with emergency Ecofin meetings to discuss the ongoing Greek situation expected to conclude today. Over the weekend, it emerged that the Greek budget deficit is now forecast to come in at 8.5 per cent for 2011, well above its target of 7.6 per cent. The EU/IMF/ECB troika is currently in Athens to decide if Greece qualifies for the next tranche from the European Financial Stability Facility (EFSF). We also have rate decisions from the ECB and Bank of England on Thursday. To round off the week, Friday brings the release of US non-farm payrolls. Last month’s was a shocker, as jobs growth was flat against an expected increase of 74,000. Another disappointment like that would keep stocks on the back foot.