Five in a row! Notwithstanding sentiment for equities waxing and waning for most of the Easter-shortened week, bourses closed strongly on Friday and capped a five-week winning streak – the first since October 2007 for the major MSCI and US stock market indices.

An encouraging pre-announcement of first-quarter results by Wells Fargo (WFC) provided some confidence for the nascent earnings season and gave a healthy boost to the financial sector and overall market.

On a related note, the Treasury Department is expected to announce the expansion of the Troubled Asset Relief Program (TARP) to aid ailing life insurance companies within the next few days, adding a third industry to the banks and automakers that have already received bailouts from the government.


Not only did global stock markets extend their gains last week, but the US dollar reclaimed a stronger footing as a result of heightened risk aversion during the earlier part of the week. Holiday-thinned trading in commodities ended with a mixed performance among the 19 constituents of the Reuters/Jefferies CRB Index. Government bonds, under threat of large-scale issuance in the coming months, also had a relatively quiet period.

The performance of the major asset classes is summarized by the chart below, courtesy of


Stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 0.8% (YTD -6.4%) and the MSCI Emerging Markets Index 2.5% (YTD +11.6%). These indices have risen by 25.1% and 30.4% respectively since the low of March 9.


Returns around the globe ranged from top-performers Ukraine (+19.4%), Egypt (+9.7%) and Russia (+8.5%) to Côte d’Ivoire (-4.3%), Macedonia (‑4.1%), Norway (-3.9%) and the United Kingdom (-3.4%), which were languishing in the red. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Among the major US indices, the Nasdaq Composite Index (+4.8%) is the only index in positive territory for the year to date. Although not yet claiming this feat, US small caps have also been running hard over the past few weeks, as can be seen from the rising trend line of the S&P 600 Small Cap Index relative to the S&P 500 Large Cap Index since the March 9 lows. The fact that small companies are now outperforming the larger ones is an indication that investors are becoming less risk averse – a positive sign for equities in general to improve further.



As far as leadership since the start of the five-week old rally is concerned, the rebounding Financial SPDR (XLF) is by far the top performer among the economic sector exchange-traded funds (ETFs). Interestingly, cyclical sectors such as the Consumer Discretionary SPDR (XLY), Industrial SPDR (XLI), Materials SPDR (XLB) and Technology SPDR (XLK) all outperformed the S&P 500, whereas the traditional defensive sectors like the Utilities SPDR (XLU), Energy SPDR (XLE), Consumer Staples SPDR (XLP) and Health Care SPDR (XLV) were all lagging the broader market. This is the type of pattern one would typically expect to emerge during a market base formation development.



John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were the Merrill Lynch Regional Bank Holders (RKH) (+16.2%), iShares Cohen & Steers Realty (ICF) (+15.8%) and Financial Select Sector SPDR (XLF) (+14.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-10.9%), iShares Silver Trust (SLV) (-4.7%) and United States Natural Gas (UNG) (-4.6%) performed poorly – in tandem with natural gas and precious metals retreating.

Next, a quick textual analysis of my week’s reading. No surprises here with key words such as “market”, “prices”, “economy”, “financial” and “banks” featuring prominently.


On the question of whether the current rally has more steam left, Kevin Lane, technical analyst of Fusion IQ, said: “It is a very fine line between a rally extension call and a retest call, though we are leaning towards the former after a pullback/pause. However, since both calls – rally or retest – are plausible we continue to suggest investors tighten up stops and portfolio VAR (Value At Risk) until more evidence unfolds. Until more clarity occurs either technically or fundamentally, I can think of worse things in the world than locking in some gains or getting stopped out at a profit on trailing stops.

“So over the next few sessions watch the skew of decliners to advancers and down to up volume. As long as we don’t get ratios of 5 to 1 or higher on both indicators the likelihood of a retest in the near term is lessened.”

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already one point above this level and has to rise by a further 9.0% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.


Although he still maintains that stock markets are witnessing nothing more than a bear market rally, Richard Russell, doyen of newsletter writers and author of the 50-year old Dow Theory Letters, on Friday said. “I was wrong. It looks as though this rally has legs. Lowry’s Selling Pressure Index has stopped rising and now appears to be topping out. At the same time, Lowry’s Buying Power Index is in a rising trend. The look of the Lowry’s chart suggests that the [short-term] direction of least resistance is up.”

From London, David Fuller (Fullermoney) opined: “… consistent and persistent trends, such as we have seen over the last five weeks, are often important trends. This continues to look like the first psychological perception stage of a new bull market – lows are rising over time, indicating that demand has the upper hand, but most people do not believe in the market’s recovery. Consequently, the perception is of high risk, while it is actually low, given all the cash available to fuel an additional advance.

“… Asian emerging and South American resources markets are currently carrying our preferred secular themes higher. The tech and telecom cyclical theme is also performing well. These look like new bull markets.

“Europe and the USA, T&T excepted, continue to underperform, not surprisingly given the economic problems. Wall Street still has the capacity to be a spoiler because we do not yet have confirmation that the early March lows will hold. Technical confirmation of a new bull market, as we have often said, comes later and requires a break above the 200-day moving average, which then also turns upwards.”

The CBOE Volatility Index (VIX) (green line in the chart below) is another indicator heading in the right direction for equity bulls, having declined from the 80s in October and November to 36.5 on Friday – its lowest close since late September, just ahead of the stock market meltdown. This is comforting as the VIX is the market’s main gauge of fear and usually moves in the opposite direction of the S&P 500 (red line).



Bill Fleckenstein, well-known perma-bear who announced late last year that he was closing his short-only hedge fund as a result of the reduced number of attractive shorting targets, said: “Now that stocks have rebounded as far as they have, the upcoming earnings season will be particularly interesting – and potentially dangerous – but it will offer information as to the sustainability of the recent advance. If stock prices can shrug off the news, then the market may be headed higher still.”

On the topic of earnings, in the coming week all eyes will be on announcements by Goldman Sachs (GS) (Tuesday), JPMorgan Chase (JPM) (Thursday) and Citigroup (C) (Friday), especially with Goldie mulling a multi-billion dollar equity offering.

For more discussion about the direction of stock markets, also see my recent posts “Video interview: ‘The tide is turning,’ says Prieur du Plessis“, “Emerging-market equities show leadership“, “Technical talk: Sentiment review“, “Video-o-rama: Five in a row for stock markets“, and “Picture du Jour: It’s earnings, stupid!“.

I regularly post short comments (maximum 140 characters) on topical economic and market issues on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

“Business pessimism remains deep and widespread across all industries and regions of the globe,” said the latest Survey of Business Confidence of the World conducted by Moody’s “Sales remain extraordinarily soft and pricing power continues to weaken.” However, it is encouraging that the Survey found that businesses were becoming steadily less negative about the economy’s prospects later this year and that the index had inched up very recently, as shown in the graph below.


But although the rate of decline in a number of economic indicators seems to be moderating, the fallout of the financial crisis has clearly not been fully arrested as gleaned from the International Monetary Fund’s (IFM) new forecast that toxic debt racked up by banks and insurers could spiral to $4 trillion. According to Times Online, the IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Turning to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 9
Significant improvement in trade balance a big plus for Q1 GDP
Initial Jobless Claims – glimmer of hope?

April 8
Minutes of March 2009 FOMC meeting – highlight concerns that led to further expansion of Fed’s balance sheet
Wholesale inventories – drop in inventories-sales ratio a positive signal

April 7
Consumer credit – households are parsimonious, not a surprise

April 6
Price-to-rent ratio – pace of decline in home prices to moderate

The minutes of the Federal Open Market Committee’s (FOMC) March 17-18 meeting show that members downgraded forecasts for GDP growth in the second half of 2009 and into 2010, adding that they expect growth “to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease.”

George Soros is more pessimistic on the outlook (as reported by CNBC), saying: “I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown.” He added that there might be “something” in terms of US growth in 2010. The recovery will look like ‘an inverted square root sign’, Soros said. “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that.”

On a more upbeat note, Bespoke highlights that the Investors Business Daily’s survey of economic optimism has increased for the second month in a row and is now at its second highest level (49.1) since the start of the recession. Although the indicator has shown steady improvement since the July low, the current level of below 50 indicates that consumers remain pessimistic on a net basis.


Another glimmer of hope is the ECRI Weekly Leading Index that has leveled off since the beginning of the year. “Since 1970, a significant upturn in the index has preceded the end of a recession by an average of two months. While the Index has dropped more than during any other period on record (since peaking in June 2007), the Index has been relatively flat since early December and has been moving up over the past four weeks,” said Chart of the Day. We’ll be watching this space.

Pulling it all together, BCA Research commented: “Now the focus has shifted to whether or not positive second-half growth will provide the base for a solid recovery next year. There is plenty of fiscal and monetary stimulus in the pipeline, but the headwinds and risks highlight that the recovery will be fragile. Much will depend on the apparent success or failure of the bank stress tests and the Treasury’s plan to relieve banks of their legacy assets. Both are wild cards that could reverse the recent improvement in investor sentiment. Moreover, consumer fundamentals remain grim due to high debt levels, falling home prices and massive payroll cuts.

“Bottom line: A bottoming in growth suggests that we have seen the lows in the equity market, but a sustainable uptrend may take time to develop and could be very choppy.”

Back to the global economy, according to George Soros, China will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010. He said world policymakers are “actually beginning to catch up” with the crisis and efforts to fix structural problems in the financial system.

Meanwhile, China’s passenger car sales increased by 10% year on year in March, thanks to sales tax cuts and other government subsidies. Also, as reported by US Global Investors, explosive new loan growth in China has prompted its banking regulator to review whether it is necessary to restrain lending practice. “According to the latest unofficial estimate, new bank loans may have reached 1.87 trillion yuan in March. This makes the first quarter’s total lending almost as much as the government’s full year target.”


Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.


Time (ET)




Briefing Forecast

Market Expects


Apr 7

3:00 PM

Consumer Credit






Apr 8

10:00 AM

Wholesale Inventories






Apr 8

10:30 AM

Crude Inventories






Apr 9

8:30 AM

Export Prices ex-agriculture






Apr 9

8:30 AM

Import Prices ex-oil






Apr 9

8:30 AM

Initial Claims






Apr 9

8:30 AM

Trade Balance






Apr 10

2:00 PM

Treasury Budget





Source: Yahoo Finance, April 10, 2009.

In addition to Fed Chairman Ben Bernanke speaking at the Fed Conference (Friday, April 17), the US economic highlights for the week include the following:


Source: Northern Trust

Click the links below for the following reports:

Wachovia’s report on the “State of the Global Economy”

Wachovia’s Monthly Economic Outlook (April 2009)

Wachovia’s Global Chartbook (April 2009)

The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.


Source: Wall Street Journal Online, April 10, 2009.

Friend Kevin Lane said: “Hope is a slippery slope and greed is not a trustworthy steed (i.e. horse), so work on removing emotion and bias from your investing/trading as much as possible. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers with taking well-informed and unemotional investment decisions.

Wishing you and your families a pleasant time during what remains of the Easter weekend.

That’s the way it looks from Cape Town (where I will be spending the next two weeks before heading back to America for a brief visit).

Cartoon from 1934 Chicago Tribune – looking familiar?


Hat tip: Charleston Voice