Stock Market Santa Rally Could Correct this Week

By: Regent_Markets

Markets pulled their socks up last week, with global equities putting some distance between the November lows and Friday’s close. The FTSE 100 enjoyed a 13% weekly gain, while the Dow, S&P500 and Nasdaq are up 17.1%, 19.9% and 18.3% from the November lows respectively. The week started well with traders liking what they saw in the massive bailout of Citi group.

The US government effectively moved to guarantee $306bn of bad loans. This, coupled with an allowed dividend of 1 cent per quarter (tiny, but more than many expected), was good news for investors, if not the US taxpayer. Investors also cheered the decision by the US government to buy mortgage backed securities from the state operated Fannie Maw and Freddie Mac. Rumours are also spreading of a plan for a huge pension bailout for S&P 500 companies. Whether this proves to be the case or not, the whispers added to the strong buying seen last week.

Despite the recent sell off in crude prices, energy companies still maintain a heavy weighting in most stock indices. Last week’s crude rally certainly helped rather than hindered the performance of equities last week. Light crude found support at $50 and rallied to close the week at $54.43. It is hoped that the announced Chinese interest rate cut will restart the Chinese economy, which was the biggest driver of the oil boom in recent years.

As always, the first week of the month is a busy one on the economic data front. The coming week kicks off with US and UK manufacturing figures, followed by Fed chairman Ben Bernanke speaking in the evening. Thursday sees the MPC release the official bank rate. Last month they shocked everyone by slashing rates down to 3%, and there is likely to be further cuts this week. Analysts are currently predicting a cut of between 50 and 100 base points down to 2.5 or 2%. The ECB is also expected to cut rates by at least 50 base points, down to 2.75%. Friday brings the all important US Non Farm Payroll figures. Analysts are expecting a drop, but downward revisions to previous announcements could also be an important factor.

Last week’s rally is all the more impressive because it came in the face of yet more dire economic data. This in itself is an encouraging sign, as markets could have easily taken last week’s US durable goods figures and PMI numbers as a cue to sell off significantly. With US markets closed for Thanksgiving, and many traders enjoying an extended holiday, European equities enjoyed some relatively quiet sessions. In fact, on some days last week the FTSE 100 traded within its tightest range since the end of September. Credit markets are continuing to unfreeze, and the VIX Volatility index closed below its 50 period moving average for the first time since the start of September. Implied volatility levels remain high, but at least there are signs of calm creeping into equity markets.

The recent tragic events in India failed to have too much of an impact of equities, with most European stocks moving little in either direction as the crisis broke. It is worth noting the muted reaction in gold prices at this time. Gold is traditionally seen as a safe haven in troubled times, yet despite the traumatic events in India, gold barely moved at all over the period of the crisis. With the implied risk of world governments defaulting on their bonds increasing, one would also have expected gold prices to increase, as investors seek out safe havens for their assets.

There are many factors affecting the price of gold, not least the strength of the dollar, but perhaps last week’s lack of reaction is another indicator that volatility is set to decrease further as we approach the last month of a tumultuous year. Just last week, 2008 was set to be the worst year on record for many markets. Although this year will undoubtedly go down in the history books no matter what happens from here, there is a chance that it won’t end as it began.

Although last week’s rally was impressive, and there are tangible signs of a volatility decreasing, it is highly unlikely that it will be plain sailing from here. We’re still in bear market territory, so pullbacks after rallies such as we saw last week are quite likely. In the short term, the market could pull back next week, December stands a good chance of finishing higher as a whole. A double touch returns a profit, if both a higher and lower target are hit within the timeframe. Place a double touch on the S&P500 at BetOnMarkets, predicting that it will touch 880 and 950 in the next 29 days, could return 192%.

By Mike Wright
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Email: editor@my.regentmarkets.com
Url: Betonmarkets.com & Betonmarkets.co.uk

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