Last week, my market pessimism got run over by an Australian rate hike as the U.S. stock market shook off a two week slide and powered up another notch. Once again, the key resistance level of 10,000 on the Dow is in sight with the Dow’s 4% gain last week.

Since Australia’s rate hike was such a catalyst for that mini-bull run last week, it’s worth understanding the bullish logic behind. The logic hinges on the argument of Australia as a bellwether of recovery and reflation in the broader global economy. To put this in more concrete terms, if Australia needs to raise interest rates, it must be growing robustly and if its growing robustly, other countries in the region must be growing as well. It follows that if Asia is growing, the rest of the world must follow. Ergo, global markets shall boom.

Let’s try on the bearish counterargument, however, for size and see whether the bullish or bearish shoe fits.

In truth, Australia has become one of China’s most important “commodity colonies.” Down under is merely as extraction pit for the coal, ore, and other raw materials needed to fuel China’s factory floor. Since China has undertaken the most massive and effective fiscal stimulus of any major economy and since its growth has been well above projections, it’s no wonder that one of its most commodity colonies is booming too. However, it doesn’t necessarily follow at all that the rest of the world, or even the rest of Asia, will be booming as well any time soon. In fact, the big danger is a collapse in what some are describing as an emerging bubble in China. Ergo, global financial markets won’t be booming anytime soon.

Perhaps the best argument for the longer term bearish interpretation of Australia’s “canary in a China coal mine” moment on the world financial stage is this observation from Market Edge about last week’s allegedly bullish move:

“The technical condition of the market deteriorated once again last week as the CTI lost another point, the Momentum Index, which gained some ground, remains in negative territory and the Strength Indexes fell into bearish ground. Despite last week's broad based advance, the negatives still outweigh the positives at this juncture suggesting that the market is vulnerable for a setback.”

I remain primarily in cash with a hedge on my long positions to see how the “Pisani Paradox” is ultimately resolved. Only when we break through key resistance levels and the fundamentals improve will I try to leverage the current up trend.

The next few weeks will help clarify the picture as its “earnings season” once again. Just remember here to ignore actual earnings and focus primarily on how companies are “guiding” for the next few quarters.

Navarro on TheStreet.com
Click here to review my videos on TheStreet.com.
———-
Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy.
Peter is a regular CNBC contributor and has been featured on 60 Minutes. His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.
Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2009 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.