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Big rise on Wall Street

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by Peter Switzer

In case you missed it, the big story on Wall Street was simple — the Dow was up 197.84 points or 1.86 per cent to 10,860.26! And the S&P 500 topped that putting on 2.12 per cent or 23.84 to finish at 1148.67.

This is nicely higher from the important 1131-level that the market has had trouble putting behind it.

The New York Stock Exchange — the market that leads global stock markets — has now gone up for four weeks in a row, making this, as I have said before in this column, a September to remember!

The gains so far this year have ranged from three to four per cent but this month the Dow Jones is up 8.4 per cent and the index has not achieved something like this since 1939. And it would be hard to imagine our local stock market won’t head higher with such a strong lead from Wall Street, especially when the driving force for this spike was economic news.

Positive signs

Two other positive observations are relevant at this time. First, the CBOE VIX, or fear index, is now down to 21.74 and when this moves into the teens it’s a sign that confidence is taking ground of fear and loathing in the markets.

Another bullish sign is that the small cap index in the US — the Russell 2000 — is now up 7.28 per cent for the year. If smaller companies are gaining traction it must be a reflection of broader US economic health. It means the general economy must be making life better for these companies.

By the way, the S&P 500 is up 9.5 per cent for the month but is only up around three per cent for the year. It was also positive to see consumer discretionary stocks were the biggest gainers, which is another good omen that maybe the missing US consumer is starting to give these businesses hope.

The good news

So, what was the good news?

First, Germany came out with a nice rise of business expectations that quite surprised the market.

Second, while the durable goods reading for August fell 1.3 per cent after being up 0.7 per cent in the month prior, if you take out transportation, durable goods in fact went up two per cent. This was seen as a very good number and much better than expected.

There were also comments made by prominent investors that they’re becoming buyers, which excited the market.

Coming up

In the US week ahead, the important economic data includes:

The Chicago Fed national activity index (Monday)
The S&P/Case-Shiller home price index and a consumer confidence index reading (Tuesday)
GDP, corporate profits and the Chicago PMI (Thursday)
Personal spending, consumer sentiment, the ISM manufacturing index and construction spending (Friday).

In Australia

On the local front, Wednesday is the big day with building approvals, home prices, private sector credit and new home sales released. Then on Thursday we get the latest reading on the health of manufacturing.

These numbers might have to be pretty bad to discourage the Reserve Bank from an interest rate rise next month, if you believe the latest predictions from economists. The money markets have moved from a below 20 per cent to 60 per cent chance of a rate rise in October.

Let’s hope they’re wrong and Wall Street keeps rallying, however it’s fair to say that this pleasant outcome is part of the reason why the RBA would feel more inclined to spoil our party.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, September 27, 2010