However, it is more than just the new maximum. First, the last week started with a serious correction attempt. Not by chance – 1016 pts. on contracts for the S&P500 (previous maximum, tested in August on several occasions) was at 38,2% retracement of the whole bear market and as such was the perfect point for the bears to counterattack. The correction attempts failed and along with it important medium term resistance had been conquered. At that point it seems obvious to ask for further perspectives. On contracts for both S&P500 and DJ30 there seems to be no crucial resistance until some 20% up from where we are now. These are the “pre-Lehman” levels. After climbing by 55% in less than 6 months can the market make such a tremendous leap again?
The answer is: it can, but not necessarily in one step. The “market indicators” give the most optimistic signs. The VIX (volatility) index slid to pre-Lehman levels already in early July and so did the TED spread. That means that risk perception is lower and financing easier and cheaper to obtain and as a result increased number of players might want to catch up the train. Also the standard deviation of daily changes of S&P500 hadn’t been lower since June 2008. Low levels of volatility used to be a precondition for the most of the bull markets in recorded history of the S&P500 index. The macroeconomic data are more mixed. The GDP in the US is nearly 4% down from the 3rd quarter of 2008 with the value added in structures down by more than 16%. The corporate profits are also down by some 20%. Without a doubt, a hope in the recovery came from a surge in activity. Certainly an uninterrupted rise in the ISM by 16 points from December 2008 to July 2009 is impressive, especially supported by similar tendencies in all developed economies. Such changes used to predict a revival in economy and a rebound in stock indices in the past with a good accuracy. Should this be true, a cautious valuation of the long-term price to earnings ratio would place the S&P500 around 1200 points, that is at the pre-Lehman level. Concluding, one might say that the data just needs to keep delivering. “Just”. On the side note, one should notice that the EURUSD is already at the level from September 2008 (as one of the very few currency pairs) which might explain its reluctance for further advances, especially as J.C. Trichet gives very cautious (in fact pessimistic) speeches.
This week probably will not be decisive in this debate. The US sentiment (Conference Board tomorrow, University of Michigan on Friday), durable orders, new home sales (both Wednesday) or the monthly income and spending data in the US (Friday) are important short term indicators but their influence will be most likely short-lived and psychological. Investors will definitely want to see an improvement in the German Ifo index (Wednesday) and hopefully in the Japanese PMI as well (Friday).
|
Przemysław Kwiecień  |
 |
