State of the Stock Market Analysis for the Week Ending August 30th, 2014 (Janet Yellen Surprises None in Jackson Hole 8-30-14)
Labor Day Weekend Recap

Bulls had wanted to head into Labor Day weekend with the S&P 500 at a record high, and while we did not top Tuesday’s intraday high of 2,005, we did see a rally in the last half hour of trading that left the S&P 500 with an all-time high close of 2,003. It was touch-and-go for most of the session as the S&P 500 hovered right around the 2,000 level, but the late session lift cleared the way for a 2,003 close. The Nasdaq was also rocking and rolling, and it even managed to hit and close at a 14-year high. The Dow was also positive on the day, but it closed about 50 points below its all-time high.

For the week, the S&P 500 gained 0.6%, the Nasdaq rose 0.9%, while the Dow added 0.6%, and the week’s action capped off an impressive performance for the stock market in month of August. As we recall, August started off with some problems. Through the first week of August, the S&P 500 fell about 4% from its late-July high. Many bears were dreaming of a potential market meltdown, but we saw an impressive reversal late on the Thursday afternoon of the seventh, and we have been charging up the field toward the end zone ever since (yes, football season is here!). For the month, we saw gains of 3.8% for the S&P 500, 4.8% for the Nasdaq and 3.2% for the Dow. That is not a bad month for what historically can be a very tough month.

The big question now is what happens when the star players return from the locker room. Institutions, hedge funds and private equity firms have had many of their key decision makers away on vacation, and some market strategists are saying that the recent record highs are suspect because they came on very light summer volume. The kickoff on Tuesday will mark the end of “pre-season,” and we should get a clearer picture of just how “bullish” this late-August run actually was. Will there be caution and skepticism in the air or will we see the big dogs stepping in and putting big money to work in a big way? Who knows, but the fact remains that we will likely get some clear answers early on in next week’s trading.

Economic numbers have been good, but not great. On Friday we saw consumer spending fall 0.1% versus the expected 0.1% rise, but we did see the University of Michigan’s August Consumer Sentiment Report rise to 82.5, versus the expected 80.1. It was basically a “push” in terms of the consumer sector, but the stock market did not seem to mind as it eked out Friday’s modest win. All eyes are on the Institute of Supply Management’s (ISM) August report, which will be released on Tuesday. Economists are looking for a 57.4% reading, which would be up slightly from July’s 57.1%. Numbers above 50 indicate expansion, so bulls are hoping to see the ISM top estimates.

So with economic numbers still coming in mixed, what else could be keeping a lid on more upside conviction in the stock market? Well, hearing British Prime Minister David Cameron basically say that a terrorist attack (by ISIS) in England is imminent, is not exactly the bullish statement global financial markets want to hear right now. Likewise, having Russia’s Vladimir Putin give another “thumbs up” to the pro-Russian Ukrainians fighting against the existing Ukrainian government is not exactly a move toward a peaceful solution. The increasing sanctions and rhetorical war with the West is creating a lot of worry throughout Europe, so you can see why the “global shock” theme is not going away anytime soon.

But the stock market is at new highs, and the Fed and the ECB are monitoring global financial markets with a microscope. The Fed may have backed off from any additional QE, but Mario Draghi and the ECB are clearly going to “do everything it takes” to keep the EU economy afloat. This is ultimately a huge, near-term plus for global stock markets since all of that QE money will likely find its way into equity markets. The problem that arises, however, is that old saying of “how something will work great…until it doesn’t.” What happens if inflation kicks in or the global bond bubble finally bursts? What happens if a “global shock” sends oil to $150 dollars per barrel? Central banks have already done “everything it takes,” and critics of these extraordinary central bank actions say that central banks are simply out of bullets to use should the wheels fall off of their grand plan.

The Gorilla does not mean to sound dark, but he did read again this week that the stock market back in 1929 peaked in the week before Labor Day weekend 85 years ago. This capped off the massive bull market of the “Roaring 20s” and we all know what soon followed. The September 1929 stock market started to shake and rattle, but the disaster of Black Tuesday, the Crash of 1929, subsequently occurred in late October of that same year. The Great Depression followed and the rest, they say, is history. This is by no means a warning, but it IS an extremely interesting historical factoid for bulls to keep in mind this Labor Day if they are getting overly giddy about this past week’s all-time high in the S&P 500. Again, things tend to work…until they don’t.

But enough of the “doom and gloom.” It is a three-day weekend, and it is the end of summer. It is a great time to hit the beach or mountains or just have family and friends over for a barbecue to watch some football. Bulls will be celebrating what is turning out to be a stellar year for the stock market, and the last thing they want to think about is “doom and gloom.” So like the song says, “Don’t worry, be happy.” September and October are often full of surprises, though, so enjoy the weekend and get some rest and relaxation. That said, the Gorilla wishes each and all a Happy Labor Day weekend, and we will be back in action on Tuesday.

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