Today’s Market Fade Telling

Stocks opened strong this morning, with the Dow up about 100, the S&P 500 up 15, and the NASDAQ up almost 50.  The positive tone soon faded, however, when John Boehner announced his support for Obama’s plan to strike Syria.  I have discussed the tendency for investors to view pull-backs as buying opportunities when the downward move is orderly, which has been the case during the recent 4% or so slide for stocks.  Today was exactly that – investors seeing the recent weakness in stocks as nothing more than a pull-back in a bull market, and stepping in at the first sign of any positive news.  Positive economic data out of Asia and Europe served that purpose over the Labor Day weekend, and investors predictably responded with buying off the open this morning.

The Dow is now down 17 points, the S&P 500 is up just 3, and the NASDAQ is holding onto some gains, up about 13.  Of notes is the S&P 500’s (so far failed) attempt to surpass the 1,640 level on the upside.  Although the index trade above 1,640 off the open, it slide back below this key resistance level, and currently sits at 1,636.  Should we close below 1,640 today, today’s trading action will serve to bolster the relevance of the 1,640 level as a key resistance level for the S&P 500.

A strike on Syria could come only after a full debate and vote by Congress on a strike when it returns from its summer recess on September 9.  Until then Obama and company will have to continue working the phones.  Still, with Boehner on board, Obama finds himself supported by an unlikely ally, which should help him push for a successful vote.

Russia will be the toughest obstacle to overcome with the UN.  Many Syrians go to Russia to study, while Russians go to Syria  for vacations, as advisors, or as investors. Over the years, Russia has also played an essential role in restructuring the Syrian economy, and wrote-off roughly 70 percent of Syria’s $13.4 billion debt in 2005.  While reliable numbers are hard to come by, The Moscow Times estimated Russian investments in Syria at $19.4 billion in 2009, covering infrastructure, energy and tourism. But with outstanding projects ranging from a nuclear power plant to oil and gas exploration, the number today may be considerably higher.  Russia will be reluctant to approve (and not veto) any attempt to pass a UN resolution supporting a strike.  So, even if Obama can get a positive vote from Congress, he may fail to win support at the UN.  He could push forward with a strike without UN support, but I think that is an unlikely scenario.  My sense is that Obama really doesn’t want to push for a strike, especially given his anti war platform that garnered him a sizable number of votes, but he feels obligated to make a strong stand and to avoid looking like a wimp.

The threat of a strike is enough to worry investors, and could certainly serve as a catalyst to push stocks into a correction phase, especially give the other challenges we face, including Fed tapering, and the historical significance of the September/October time-period.  (Please see my article: Beware September, Historically the Worst Month for Stock Performance – Published in Noozhawk on Monday, September 3, 2013).  Today’s action is a strong indicator of what we can expect going forward, as even the most optimistic investors bend under the weight of the negativity surrounding the markets.

 

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