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Why Rallies in S&P 500 Are Falling Short

NEW YORK ( TheStreet) -- The S&P 500 has been attempting to rally after U.S. growth data indicated that the economy expanded at a rate of 2.5% during the second quarter -- more than double the rate posted during the previous three months. This result was well above the 1.7% that was initially expected by the market consensus, and the positive news is being taken alongside the reduced possibility of military actions in Syria.

With emerging markets in freefall and the potential reductions in Fed stimulus programs in the next few weeks, bullish investors have taken every available opportunity to capitalize on evidence of reduced uncertainty.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Syria Strikes Gold Mining Stocks</em></a>]

However, low volumes and a longer-term outlook that involves several key event risks means that the broader arguments for continued range trading remain intact.

On the positive side, discussions over collaborative agreements between Verizon (VZ - Get Report) and Vodafone (VOD) have helped sentiment. Also, Guess? (GES - Get Report) saw single-session gains of more than 10% after its second-quarter earnings report showed a better-than-expected performance on the profit side. However, falling energy stocks are helping limit rallies because reduced concern over Syria conflicts has led to lower oil prices.

GDP Not Enough to Sustain a Rally

While the latest GDP figures are encouraging (and help support the Fed's view for growth into the latter part of the year), there is little reason to believe this data will be interpreted as positive enough to generate a sustainable rally. To be sure, the 2.5% GDP reading virtually ensures the Fed will have enough positive economic momentum to begin tapering its quantitative easing programs, but these reductions in stimulus will provide additional headwinds in equities for the next few months.
[Read: <a target="blank" data-add-tracking="true" href=""><em>5 Stocks Under $10 Triggering Breakouts </em></a>]

Since Fed stimulus has been one of the central drivers in the 150% rally in equities that we have seen since the March 2009 lows, reductions here could have unanticipated effects on investor sentiment as this historically accommodative era comes to an end. For those investing on broader time horizons, any dips fueled by changes in Fed policy will ultimately create buying opportunities -- but the most important figures going forward will be indicators of strength or weakness in the labor market, rather than headline GDP.
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GES $17.88 0.00%
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