Will the global market rally end in tears?
We believe these fund managers (along with many others in the investment community) remain poised to buy any correction. In other words global investors seem perfectly positioned to buy stocks during a forthcoming sell-off. Markets seldom deliver what the consensus expects. A period of consolidation and/or a mild correction now seems warranted given the strength of the global rally. Economic data has to be digested and further evidence needs to be seen that a recovery is underway before stockmarkets can rally to new highs.
The medium to longer term outlook is encouraging in our opinion. The record level of stimulus thrown at the global economy is beginning to take effect. LIBOR, the interest rate at which banks lend to each other in the UK, continues to subside which is a clear indication the effects of the 2008 credit crunch are beginning to ease. The VIX (volatility index) continues to decline from historic record levels of 90%, and we would not be surprised if the index falls into a lower range between 20% and 30% in coming months. This is another clear sign that global investors are now prepared to embrace more risk.
As evident on the charts, the major US indices have traded in a relatively narrow sideways range for the past two to three weeks. Encouragingly, this has allowed many near-term momentum indicators to retreat from overbought readings, which in our opinion, now allows for further upside once this latest consolidation is complete. However, overhead resistance (marked on the chart) is situated at 943/9008 for the S&P500/Dow Jones. Several more weeks of consolidation may be needed first, before both indices can muster the momentum for a sustained break higher.
Longer-term, we firmly believe the medium term trend is now up, and any weakness should be viewed as temporary. Support is located between 804/780 and 7790/7440 respectively for the S&P500/Dow Jones.
Emerging stock markets have recovered strongly, with countries such as Brazil and India leading the way in the last week. The SENSEX has been one of the strongest performing global indices in 2009. From the March low of 8047, prices have increased by as much as 85 percent, reaching a high of 14930 last week. The strong gap higher above resistance at 12515 is a very encouraging sign. Any correction from current level should be limited to this level. We continue to be favorable towards emerging economies such as India which have a major future and significant growth potential in the global economy.
The economic picture has also become clearer in China, with growth in domestic GDP now expected to lift to between 8% and 9% over the coming year. The Chinese have emerged as strong buyers of base metals (and gold) in recent months, which has seen the end of inventory destocking and a new cycle of restocking appears underway. This is perhaps the clearest sign yet that major lows have been seen in commodity markets.
Corporate activity by China in the global resources sector has continued at a frantic pace. China has this year been active in Venezuela, Brazil, Africa, and Australia in its ongoing bid to buy into Rio. China is clearly seeing through current gloom to the beginning of a new cycle and this could be one reason why they seem so intent on securing supply of natural resources at favorable prices today.
The Chinese stock market has led the world higher (a major low was reached in October/November last year, well before other markets bottomed in March), with the CSI 300 Index hitting 2850 this month. The steady and consistent nature of this advance gives us confidence that this is the beginning of a sustainable upward trend, and potentially a new bull market. We view any correction from current levels as a buying opportunity.
