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Stocks are poised

13 March 2009

The Macro Trader’s view:

The latest leg of the Bear market began around February 2nd as a result of yet more uncertainty and bad news coming from the financial markets culminating in the US government taking a sizeable minority stake in Citi Group and the UK government taking a majority stake in Lloyds Banking group. At the same time RBS announced the largest UK corporate loss ever.

This seemed to set the scene for the market to sell off further as investors in financial stocks seemingly ran the risk of seeing their investments destroyed by governments that cared little for private equity as they conducted a crusade to avoid financial market collapse.But just a few days ago, when it seemed as though the Bears were about to run rampant, the market embarked on yet another vicious short covering rally.Some, eternal optimists, have declared that a turning point in the markets fortunes may have been reached. They cite as their reason comments from the head of Citi Group who
announced earlier this week, “that so far the start of 2009 had been profitable for the Bank”. Additionally, J P Morgan Chase, have released similar comments with Bank of America sounding even more positive, when they announced yesterday, that they may be able to get by without unloading toxic assets.

After months of dire news from the Banking industry, traders and investors were clearly cheered by this news and the market rallied. However, policy-makers in the US are not as easily convinced as they announced that they stand ready to offer Citi Group more assistance if needed; do they know something?

And here in the UK, Chancellor Darling has begun dropping hints that there will be no new fiscal boost in his upcoming budget, which runs contrary to expectations. Yet this is not the complete picture. This weekend the finance ministers and Central Bank governors of the developed and major emerging economies meet under the G20 banner to discuss the global recession and explore what can be done, ahead of a G20 summit of heads of government to be held on April 20 in London.

The markets are clearly hoping that a broad-based plan for recovery can be achieved, but already there are differences between the US and EU. The US, together with the UK, is pushing for the G20 to agree to a new global fiscal stimulus, but the EU/Euro zone argues that isn’t the way forward. So unless this major hurdle can be overcome, financial markets look like being seriously disappointed. With most economic summits usually failing to agree anything of significance, other than a communiqué which states everyone will do all he can without setting out exactly what will be done, we see these two events as likely setting equities up for another sharp selloff.

Interestingly, at the same time as Prime minister Brown is calling for more fiscal action on a global scale, his Chancellor is lowering expectations at home; Brown has spent so long jetting around foreign capitals, he seems out of touch with his own finance minister, not a good omen for broad-based agreement among foreign heads of government!

The Technical Trader’s view:

Germany has yet to test the lows of 2003. The support from the prior High at 4190
looks to have broken. So the market has renewed downward momentum…

Driven by – a clear completed Continuation Triangle. The minimum target? Around 3000.
Still somewhat short of the lows of 2003….

This familiar chart demonstrates how much lower and technically weaker the Us market is: the lows of 2002 have been taken out – and a Double Top completed. The minimum move for this market is a good deal lower still – beneath 400. While the bear prospects for each are very different (at the moment) they are both remain unequivocally bearish. With powerful resistance above each market.

Mark Sturdy,
John Lewis
Seven Days Ahead

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