As you all know, the NASDAQ Composite and the S&P 500 Index
have soared to new 52-week highs. The last stock market correction
that took place lasted about eleven trading days into the August
7th, 2014 bottom. Last week, almost every trader and investor had
their eyes on the central banker's comments from Jackson Hole,
Wyoming. Apparently, the central bankers did not say anything to
spook the markets ahead of the U.S. Labor Day holiday. So at this
time, everything looks great for the major stock indexes to trade
higher into the end of the month. Below I will list three reasons
why this current stock rally will likely end soon and cause the
month of September to be a month to remember.
1. Geopolitical events will have a negative effect on the stock
market in September. So far, the major stock indexes have climbed
the wall of worry when it comes to the major geopolitical events
taking place around the world, but that will likely end after the
August month is over. The problems in Russia and the Ukraine are
not likely going to improve anytime soon. Tensions will certainly
build before any resolution or peace treaty takes place. There are
also major problems in the Middle East that do not seem to be
ending anytime soon. The Ebola virus is also a huge negative that
could affect and hurt trade around the world in the coming months
should the virus continue to spread.
2. Any weakness in the USD/JPY will disrupt the current carry trade
that fuels the liquidity for the major stock indexes in the United
States, Europe, and Japan. You see, the weaker Japanese Yen has
helped the large financial institutions to buy stock indexes like
the S&P 500 Index and the Nasdaq Composite. This is a very
leveraged trade and helps provide liquidity for the stock markets
around the world. Everyone knows that Japan is diluting their
currency at an alarming rate. This is why the stock market now
rallies when the USD/JPY currency pair rises and declines when the
currency pair sells off. A weak U.S. Dollar Index will now hurt the
stock markets primarily due to the yen carry trade. Recently, there
have been many countries talking about getting rid of the U.S.
Dollar as the world's reserve currency. If nations such as Russia,
China, Brazil, and others start to trade without using the U.S.
Dollar it could spell problems for the stock market down the
road.
3. Stock market complacency is now at an all time high. Just think
about this, there has not been a 10.0 percent stock market
correction in over two years now. Every stock market dip has been
viewed as a buying opportunity. Investors simply believe that
central bankers will just continue to stimulate markets via money
printing if stocks decline. Currently, the Federal Reserve is
tapering their QE-3 program. They are expected to end the QE-3
program in October 2014 at their next FOMC meeting. The last time
the Federal Reserve ended a quantitative easing program the major
stock indexes staged a correction of more that 10.0 percent. Could
this happen again? This has also been the best year for new stock
offerings (IPO's) since the tech bubble in 2000. If that is not
telling us that the investing world is as complacent as ever
nothing will. Get ready, this September is certainly going to be an
interesting month.
Nick Santiago
InTheMoneyStocks
