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 11 trading days into the August 7, 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 August is over. The problems in Russia and the Ukraine are not likely going to improve any time 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 any time 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 than 10.0 percent. Could this happen again? This has also been the best year for new stock offerings (IPOs) 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
