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Have stocks decided?

01 May 2009

The Technical Trader’s view:

The pull back of the market into the continuation triangle is clear. The bears should be losing their short-term optimism. Has a bottom formation been created? Look closer…

The detail of the market shows how there is indeed a plausible Head and Shoulders reversal.
Note too, the break up through the 61.8% retracement of the bear move from January to early March.
Note too, the push up through the Prior high Pivot at 4119. And, need we add, there is the completion
of a Continuation Triangle?

The market is set fair …technically.

The Macro Trader’s view:

All though economic data in the leading economies continues to show weakness, some reports have begun to send mixed signals:

- In the Euro zone the German ZEW and IFO surveys recently came in better than expected,
- In the UK retail sales last Friday were stronger than expected, and
- In the US New home sales came in above consensus.

This has led to a growing sense among traders that a recovery may not be that far off, and equity markets have been steadily rallying away from the lows since early March.
Initially we took the move as a correction in a bear market and there has been plenty of
economic data released to support our view that economic activity continues to weaken:

- In the UK last Friday the release of a much weaker than expected Q1 GDP figure at -1.9q, -4.1y/y,
- In the US Q1 GDP released on Wednesday was also much weaker than expected at -6.1%, and
- In Japan the authorities there have revised lower their forecasts for GDP to -3.3%.

But still equities continue with their rally. In part this can be attributed to improving results from several leading US Banks, together with an increase in activity in the wholesale money markets as Banks have nervously begun lending to each other again.
Moreover, in the US earnings reports in recent days have been better than expected. But one event that makes us think twice about our long-held view of this market ( as a short-covering rally) is the reaction to the threat posed by the recent outbreak of swine flu. This is deemed to have the potential to cause a pandemic and since it is an unknown strain it could cause many deaths and severely disrupt economic activity at a time when the global economy is already experiencing recession. For sure no one knows how this flu will evolve, it may prove deadly, it may not, but no one knows and markets do not usually take unquantifiable threats easily, but they have, which leads us to conclude that maybe there is something a little more durable about the current rally.

The Fed policy statement released on Wednesday said that the economy was set to remain weak, but that policy makers are detecting a slowing in the pace of weakening, and this appears to be the message the leading equity markets are sending.

Just how reliable this rally is could be put to the test in the coming days and weeks as the world watches to see how the swine flu outbreak evolves; if the worst case scenario hits, with many deaths, locked down economies and a plunge in economic activity, the market may yet sell off, but if the outbreak does prove manageable, then the worst in the equity markets may be over.

Mark Sturdy,
John Lewis
Seven Days Ahead

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