STRATEGIES

All it took was a few words from Europe's top banker to turn stocks around, but can the momentum last? MoneyShow's Tom Aspray shares his near-term outlook and the specific investments that bear watching for savvy investors.

The surprising comments from European Central Bank’s Mario Draghi on Thursday rocked the markets, with the Spyder Trust (SPY) closing up almost 2% for the week, making it the best week for the entire month. The Dow Industrials were able to move above the psychological level of 13,000. Both are now positive for the month.

It was not only stocks. Gold also came to life, as the SPDR Gold Trust (GLD) was also up over 2.5% for the week. The euro, which Draghi promised to defend at all costs, hit a low of 1.2042 on Tuesday, but closed the week at 1.2367.

On Friday, both German Chancellor Angela Merkel and French President François Hollande voiced their support for the euro. Added to Draghi’s comments, it gave global markets another shot in the arm. Further reports Friday afternoon regarding an upcoming meeting between the Draghi and the Bundesbank’s head squueezed those on the short side even more

The dollar has reversed sharply, but the September Dollar Index needs to drop well below 81.50 (the mid-June lows) to complete a top. A weaker dollar would be very supportive for US stock prices.

Many are wondering if this is enough to put a floor under stock prices, and whether the world stock markets have already seen their lows for the summer. This may be the enough to convince some market professionals who have been sitting on the sidelines in fear over an imminent euro collapse.

For the individual investor, I think it will take more reassurance, as most are disillusioned and don’t trust the markets. Sentiment and confidence play an important role in the markets, and I think it will take a period of time (or much lower bond prices) to bring individuals back to the market

chart
Click to Enlarge

I think many will be surprised by this chart. (I was.) It shows that the German Dax has outperformed the Spyder Trust (SPY) by over 2.5% so far in 2012. The Dax surged last week from a low of 6,324 to close at 6,689. It is still below its mid-July high of 6,775.

The Dax was up over 21% in mid-March. Those who have been long the Comex December gold futures are up just 2.7%, which trails the 9.8% gain by SPY.

The economic news last week was mixed. While new home sales were much weaker than expected, the pending home sales last Thursday were not nearly as bad. Then we got the initial reading on second-quarter GDP on Friday, which showed 1.5% growth, slightly better than the 1.3% growth that most expected.

chart
Click to Enlarge

The stock market seemed to ignore the data that indicated it was the lack of consumer spending that was holding the economy back. Exports were fairly strong at 5.5%, and of course will improve much more if the dollar weakens.

The ECB action could be just the first step as they could lower rates this week. The FOMC also meets and one wonders if they will vote in advance to take action if Friday’s monthly job report is weak.The FOMC meets this week, and one wonders if they will vote in advance to take action if Friday’s monthly job report is weak.

There is a full economic calendar this week, as Monday we get the Dallas Fed Manufacturing Survey, followed on Tuesday by the personal income and outlays, S&P Case-Shiller House Price Index, Chicago PMI, and Consumer Confidence. Also, the FOMC meeting starts on Tuesday.

Then on Wednesday, we get the widely watched ADP Employment Report, along with the ISM Manufacturing Index. Of course, the deterioration in past measures of manufacturing activity has concerned the markets for several months.

In addition to jobless claims Thursday, we also get the latest data on factory orders. The ISM non-Manufacturing Index comes out Friday at 10 a.m. EDT and follows the release of the monthly iobs report at 8:30 p.m.

NEXT: What to Watch

Tickers Mentioned: SPY, DIA, QQQ, IWM, GLD