September was golden but cooler days are due

SEPTEMBER’S prodigious rally in the American S&P 500 index has taken many investors rather by surprise. Despite falling yields on US Treasuries and gold rallying, the index is on track for its third-best monthly performance in the past decade.

The S&P 500 has been driven higher by tech stocks, which have risen 12.71 per cent so far this month. Consumer discretionary and industrials also helped lift the index, rising 11.82 per cent and 11.71 per cent respectively. These sectors’ better performance has been caused by defensive investors seeking yield in a low interest rate environment. It is also no coincidence that both tech stocks and materials firms have the highest international revenues exposure. More than half of tech firms’ earnings come from outside the US while the figure for materials stocks is 41.6 per cent, according to Bespoke Investment Group.

Should contracts for difference (CFD) traders be expecting further gains in the index as we head into the back end of the year? Equity strategists are generally bullish. The global economic expansion is expected to continue, which should increase investors’ risk appetite and, by extension, their desire to own shares in S&P 500 stocks.

While the US economic outlook is sufficiently gloomy for the Federal Reserve to hint strongly last week at another bout of quantitative easing (QE) come November, this should support the equity markets.

While Barclays Capital equity strategists, led by Barry Knapp, don’t believe QE2 is the most likely scenario, they do say: “If the economic data continues to disappoint, there’s little doubt the Fed would make a major effort to boost financial asset prices further: The Greenspan put has thus become the Bernanke put. With the economic cycle and central bankers decidedly supportive, how badly can financial markets perform?”

So what levels should CFD traders be aware of when it comes to trading the S&P index? It is currently trading just below the 1,130 level, which has recently acted as a major resistance to the upside. A break higher would open up 1,170 in the short-term and then the year’s highs of 1,219.

However, the index has started to turn down towards the 200-day simple moving average at around 1,118 – a break below here should make CFD traders exceedingly wary of adding to long positions. While either better economic data or Fed action ought to keep the S&P relatively well supported over the coming months, traders should not rule out a short-term dip lower and be prepared to place stop losses appropriately if they can’t stomach the volatility.

The Bernanke put should ensure relatively little downside for the US stock market but CFD traders should not be expecting a sharp move higher; this is an index that is likely to inch steadily upwards over the next couple of months.