Stock Market Showing Great Resilience But Has it True Bull Legs?

By: Seven_Days_Ahead

The recent sell-off in the S&P and other leading equity markets in reaction to the earthquake/natural disaster in Japan and fighting in Libya, appears to have run its course, since the S&P has rejected the recent lows.

The Technical Trader’s view:

The Macro Trader’s view:

The recent sell-off in the S&P and other leading equity markets in reaction to the earthquake/natural disaster in Japan and fighting in Libya, appears to have run its course, since the S&P has rejected the recent lows.

The feared nuclear catastrophe in Japan hasn’t yet materialised. That is despite

• the struggle to bring the badly damaged nuclear generating plant at Fukushima under control.
• drinking water in Tokyo being declared unsafe for infants to drink due to radiation contamination
• the logistical nightmare of keeping a city the size of Tokyo supplied with bottled drinking water
• and the continuing disruption to Japan’s economy.

Equity traders are, it seems, relieved a much worse event hasn’t occurred such as the core of one or more of the 6 reactors at the Fukushima plant melting down.

In Libya, traders seem relieved the UN authorised no fly zone has stopped Gaddhafi from attacking his own people, but it has done nothing to restore Libya’s oil exports.

So what has changed sentiment in the S&P over the last few days? Traders have refocused back onto US fundamentals. The US economy continues to improve as the Fed itself noted as much in last week’s FOMC policy statement.

But they also said policy needs to remain loose until the recovery becomes self-sustaining. Additionally, fiscal policy in the US remains expansionary. So while bond and currency traders fret that the US public finances are on an unsustainable path, leading to a massive build-up of the National debt, equity traders take the view, the slack fiscal policy will fuel the economic recovery.

What is clear is that the world economy has experienced a recession different to other post WW11 recessions, and the policy responses needed to turn activity around and restore growth, has also needed to be different.

At the same time the world has changed, and indeed is still changing. The US is no longer the unrivalled global economic power house; others are competing for that title. The main contender is China, but India and Brazil aren’t far behind.

This impacts the world economy in two main ways:

• The opportunities for trade are greatly expanded meaning greater opportunity for prosperity for more of the world’s people, but
• There is greater competition for natural resources, especially energy, namely oil and this threatens to cause inflationary problems as global activity increases.

The other area where the world is changing is in the Arab world. Here a people, for so long dominated by powerful rulers, are seeking democracy and a greater say in how their affairs are managed. While this is great news from a humanist standpoint, there is also a worry that significant amounts of the world’s oil exports could be interrupted if the protests develop along the lines of events in Libya.

So while the S&P is supported by domestic US policy, there remains a real threat of volatility from important external influences. This market looks bullish, but it is likely to suffer from repeated episodes of risk aversion. 

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level techni44cal and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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