Pessimism Fatigue – Markets rally

May 22, 2012

FOREX, Global Macro

The market selloff and fear of last week was but a memory overnight as more positive feeling buoyed equities and risk assets and put upward pressure on bond yields.

The S&P 500 is up 1.6% to 1315.99, the FTSE rose 0.7% and the other Bourses of Europe were mostly higher, the Euro is back above 1.28 and the Aussie Dollar has regained 0.99 cents. Dr Copper rallied 1.87% with Crude (WTI) up 1.2%, Gold sits at USD 1593 oz.

This bounce is really no surprise after a week like the last one we just went through as we suggested yesterday. I’d probably summarise the positive price action as largely riding on the back of pessimism fatigue and oversold technical levels on a host of markets. Nothing has changed from last week really though has it? The G8 meeting was a confused fizzer on the one hand entreating Greece to stay in the Euro but on the other trying to promote growth.

Certainly Chinese Premier Wen’s comments reported yesterday were a positive in our time zone – but as you’ll see below they are certainly more tentative than outright optimistic,

“We should continue to implement a proactive fiscal policy and a prudent monetary policy while giving more priority to maintaining growth”

The reason for the tentativeness in my view from Premier Wen is that he is trying to stimulate domestic demand consumption and stabilise external demand both of which are problematic in the current environment.

So how was it that I thought over the weekend that it was time for a bounce as I highlighted in yesterday’s piece and where do I think this market is going now.

The answer to the first question can be found simply in the price action of the markets, they were oversold in the short-term, they had hit a number of my targets and as a behaviouralist I felt that we had had a little pessimistic crescendo last week and we were going to need substantial fresh BAD news to knock markets lower on this basis. Here is the link to yesterday’s piece again if you haven’t read it.

My indicators suggest that there is further upside potential yet in this counter-move before it runs into headwinds again.

  • 1339 seems a reasonable first target on the S&P 500.
  • 4132 – 4165 in the ASX 200
  • 1.0130 – 1.0200 seems reasonable in the Australian Dollar US Dollar Cross
  • 1.2885/90 – 1.2960 in the Euro
  • 3.49% in Australia 3 year swaps

These are only 5 of the many markets I watch and these bounces might look big from where we are but in the context of where we came from they are the smallest retracement that one would usually expect from oversold conditions such as we have now.

Longer term though I remain committed to the view that this selloff recently is part of a broader selloff which is resulting from a shift in focus from free money associated with zero interest rate policy and monetary stimulus globally to a recognition that the global growth profile is and has deteriorated. Thus future earnings and future cashflows are being adjusted and so to then price targets and risk tolerance amongst investors and traders.

But for now markets are making hay while the sun shines.

Have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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One Comment on “Pessimism Fatigue – Markets rally”

  1. macromon Says:

    Good stuff, Greg! Keep up the good work.

    Reply

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