The major index ETFs managed some damage control over the past week to reduce the losses sustained in the month of August to -5.65% for the S&P 500, which was its worst month since May 2010.

It could have been a lot worse, as fears that the economy was headed back into a recession, along with worries about the European debt crises, occupied traders around the world all month.

Optimism that the Fed will eventually lend assist again pulled the major market ETFs out of the doldrums over the past 7 trading days. With light volume and a host of crucial economic reports still on the agenda for this week, it remains to be seen whether this rebound actually has legs or turns into another head fake.

The big 4 reports (weekly jobless claims, productivity gains, ISM manufacturing index and motor vehicle sales), all due out tomorrow, will set the tone at least for one day until Friday’s all important jobs report will be published.

Here’s where the jobs numbers can get downright perverse.

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Today’s rally received support after the August Fed meeting showed that some officials are in favor of another move that might boost the economy, although there was no overall consensus.

A second assist came from the president of the Federal Reserve Bank of Chicago, who chimed in that he would back more stimulus efforts as well. Lovely; since QE-2 did nothing for Main Street but everything for Wall Street via a nice rebound, let’s be sure to do more of that. Go figure…

While equity ETFs closed modestly higher, precious metals were the main beneficiaries of these announcements with gold surging back above the $1,800 level with interest rates heading lower again.

Somehow economic reality is not something that matters to Wall Street right now, but eventually it will. Consumer confidence plunged to its lowest level since March 2009, which is the infamous month the major averages hit their lows after the 2008 crash. With the consumer contributing almost 2/3 of economic activity, this does not bode well for the future.

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No negatives with any impact on the markets could be found today, as the major market ETFs shifted into recovery mode in part by driven by relief that Hurricane Irene’s damage appeared to be less than expected while, at the same time, consumer spending was stronger than expected.

Adding to that bullish menu was renewed hope that the Fed may after all produce some kind of rescue program this fall. Who knows, I did not read anything about it, so maybe it’s nothing but a rumor started to assist the bulls…

News out of Europe was cheerful, as it was announced that 2 of Greece’s largest banks were discussing a merger, which caused local stocks to have their best one-day rally in 20 years. Hmm, I just can’t figure out how merging 2 insolvent banks might resolve the enormous debt issues.

As the rally got under way, it did not fall apart half way through the trading session as we’ve seen so many times during the last month. This caused additional buying along with short covering providing more ammunition to the upside.

The only fly in the ointment was very light volume with many traders and money managers still being out of town this week. I would expect more exaggerated moves until everyone returns after Labor Day, so don’t read too much into this week’s action.

Nevertheless, as markets go higher, we need to pay attention to our hedged position, which closed the day as follows:

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