Progress, But Not Out Of Woods Yet

The financial markets continued to rise early Tuesday afternoon based on a carryover from Monday's news regarding Syria and China. The Washington Post noted hurdles remain on the Syrian front:

An unexpected Russian proposal for Syria to avert a U.S. military strike by transferring control of its chemical weapons appeared to be gaining traction Tuesday, as Syria embraced it, France said it would draft a U.N. Security Council resolution to put the plan into effect, and China and Iran voiced support. But major questions remained over whether the specifics of a resolution backed by France and the United States could win the support of Syria's longtime patron, Russia, whose foreign minister appeared to be balking Tuesday at France's proposal of a binding Security Council resolution.

Lagging Dow Reshuffles Deck

On a relatively light day for fresh market-moving news, upcoming changes to the Dow Jones Industrial Index seemed to be grabbing the market's attention. From Bloomberg:

Goldman Sachs Group Inc., Visa (V) Inc. and Nike Inc. (NKE) will be added to the Dow Jones Industrial Average (INDU), replacing Bank of America Corp. (BAC), Hewlett-Packard Co. (HPQ) and Alcoa Inc. (AA) in the biggest reshuffling since April 2004. The changes will boost the influence of banking and computer companies in the 30-member gauge as the fifth-biggest U.S. bank by assets and the largest payment network join seven other financial and technology firms, such as JPMorgan Chase & Co. and Cisco Systems Inc. The changes will take effect after the close on Sept. 20.

According to the press release from the Dow Jones committee who crafted the changes, reasons for the swaps included the "low stock prices" of the three companies being removed and the "desire to diversify the sector and industry group representation of the index."

Mark Your Fed Calendar

The markets are still celebrating what they hope is an avoidance of the worst-case scenario in Syria. The distraction has pushed the three-month long obsession with tapering to the back burner, at least for the time being. From Bloomberg:

The Fed is watching economic data ahead of its Sept. 17-18 meeting as it considers reducing its monthly $85 billion in asset buying. Economists estimate the Fed this month will taper its monthly bond buying by $10 billion, to $75 billion, according to the median of 34 responses in a Bloomberg News survey.

Fed and Resistance

The upcoming Fed announcement may provide an excuse for traders to focus on some fast approaching technical obstacles for the bulls. The S&P 500 ETF (SPY) found buyers several times near the blue trendline below. In technical analysis, the expression "what once was support may now act as resistance" could provide an excuse for traders to nail down some short-term profits.

Investment Implications

Based on the recent improvement shown in our market model, we added to our U.S. (VTI) and foreign (FXI) equity holdings last week and again Monday. The S&P 500 held near the 1680 to 1685 level for over two weeks in July (see chart below). That range represents the next hurdle for the bulls.

Below 1680-1685 on the S&P 500, we will most likely remain in a holding pattern. Above 1685, our model will most likely call for added stock exposure for a potential push toward 1732