September 11, 2010

Reasons To Be Optimistic?

Although some countries have recently started to free themselves from the shackles of the great recession, the US economy is still struggling to find a firm footing despite massive stimulus efforts by the administration.  A persistently high unemployment rate, officially at 9.6% but possibly much higher considering the record percentage of long-term unemployed, residential & commercial property markets still in the doldrums, record delinquencies & bankruptcies, the list goes on...

Ever since the US equity markets recovered from their darkest days (S&P500 at 666.79 in March-09) and recouped some 60% from then until the end of 2009, the disconnect between Wall Street and Main Street couldn’t have been more obvious.  Financial Institutions who had been on the brink of destruction before, suddenly raked in massive profits while the real economy barely lingered on. The first half of 2010 saw quite a pull-back with all major market indices heading South again.  The S&P 500 was down 9% during the first six months of this year.  Worse yet, Chinese Stocks got hammered nearly three times as bad with the Shanghai Composite showing a loss of 26% for the first half of the year.  Stocks have so far been leading the real economy while the negative performance of the first half of 2010 is still being digested.  If this relationship of leading and lagging indicators holds true, the US job market is not going to see any improvement for the remainder of this year.

Looking at the US market from a pure technical trading perspective, there are some reasons to be cautiously optimistic, at least in the medium term. Although the S&P500 is still over 100 points away from its recent high, the index just pierced through an important bearish resistance line on the upside. At the same time, the major support levels at 1000 and 1040 areas held up well so far.  


Another indicator, the popular Fibonacci retracement levels, confirm that the recent short-term down cycle since Mid-August has been reversed as prices moved outside the typical retracement levels; probabilities are higher for a retest of 1130.


The major US Indices are barely at break-even for the year right now but these basic technical indicators give rise for a decent enough chance to gain some additional ground beyond the 1130 level on the S&P.  A rally beyond that would be gravy, particularly in view of the outlook for the real economy.



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