Reliance Investment Management

The S&P 500 closed at 1,406 for the week ending August 31, 2012.  The markets in general reported a low level of trading activity as many participants awaited the Jackson Hole speech from Fed chairman Ben Bernanke.  Their patience paid off as Fridays speech by the Fed chairman resulted in several sharp intra-day moves in the sectors that are most affected by monetary policy.

The S&P 500 finished higher by 2% for the month of August, 2012.  Trading volumes in the month of August are usually lower than other months of the years and this year was no different.  Investors right now are feeling very complacent as Volatility levels reached their lowest levels over the past year  in this month.

The S&P 500 is now within 20 points of it’s multi-year highs of 1,419 on a weekly close that was achieved on April 2, 2012.  We would like to highlight on this chart the recent two short term market tops by the S&P 500.  The  black line line connects the two recent market tops at 1,419 in April, 2012 & 1,418 in August of 2012.  Technically this is exactly how a double top formation would appear.  A double top formation is a bearish technical indicator.

(Click on Image of Chart for a Bigger Picture)

While a Double Top formation is a generally bearish technical indicator, the 50 day and 200 day moving averages are both trending higher and these moving averages will help to provide support to the S&P 500 around the 1,390 and 1,375 levels.

Ben Bernanke Jackson Hole Speech

Across the globe, the entire investment community had been eagerly awaiting for weeks the Fed Chairman’s speech on Friday.  In his speech,  Mr. Bernanke promised more quantitative easing if the economy and financial markets needed it.

What caught some market observers by surprise was the strong words used by the Fed Chairman in signaling that he was ready to use more aggressive monetary tools to assist the weak labor market.  Below an excerpt from Bernanke’s  on a renewed emphasis by the Fed for using monetary policy as a tool for improving the labor market:

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Ben Speaks – Gold Listens

As soon as the text of Mr. Bernanke’s speech hit the press wires, Gold and other precious metal turned higher.  Below is a chart that illustrates the immediate impact on the precious metals markets  that Mr. Bernanke’s speech had on Friday:

(Click on Image of Chart for a Bigger Picture)

Gold has been in a correction for the past 12 months after hitting a high 0f $1.924 in 2011.  We recently became bullish on Gold again and we alerted our readers to this in a prior article.   Technically speaking, Gold is now in a much more bullish pattern after breaking out over it’s 200 day moving average and putting in a series of higher lows as the chart below illustrates:

(Click on Image of Chart for a Bigger Picture)

For those investors who are long Gold, an ideal setup  over the next two – three weeks would be for Gold to retrace back to the $1,650 level – hold and consolidate there – and then begin a move higher.

What? – Housing Prices are Increasing at the Fastest Rate in Years?

We would like to take a quick moment to share with our readers the following chart.   This is a 27 year chart that shows the rate of housing price increases and decreases in the USA.

To many people surprise, over the past three months house prices have increased at an annual rate of 11.6% – this is the fastest rate of increase since 2006!  The blue line of the chart shows the 3 month annualized average that has sharply accelerated higher.

(Click on Image of Chart for a Bigger Picture)

We have been bullish on the USA housing market in 2012 and would like to highlight  to our readers there are bargain investments in housing in the USA  southwest – especially when you compare housing prices on a relative basis with worldwide affordability.  Housing in the Southwest is now relatively inexpensive.

Forecast For The Next Week

At this time we are certain of one thing – that is everything is going to get much more interesting (and volatile) over the next few weeks – here’s why:

1. S&P 500 is near multi-year highs.
2. Volatility levels are at 12 month lows.
3. September & October are historically the weakest months of the year for stock prices.
4. The Presidential election cycle is now entering the final weeks with both candidates nearly even.
5. Mitt Romney has called for replacing Fed Chairman Bernanke if elected.  Earlier this year, the markets were rallying on the perception of an improving chance that Romney might win.  Now the markets might not know what to think of a Romney victory  because Ben Bernanke’s  Quantitative Easing programs have been excellent for asset prices.  This uncertainty will introduce more volatility to the markets over the next few weeks.
6. The economies of Europe are in a recession.  The Chinese economy has slowed considerably and while not in a recession there is very little growth.  The question arises how much longer can the USA economy continue outperforming in a highly correlated world?

We continue to advise readers to take some strategic profits in their portfolio’s while USA markets are at or near their  multi-year highs and while the worldwide economies continue to report an tougher macro-economic environment.