The equity markets headed northbound, making new highs for 2009 last week, as solid earnings and encouraging economic news pushed investors back into riskier assets.  The large cap S&P 500 closed the week up 24 points or 2.25%. The S&P 500 Index created a new high for 2009, hitting 1,105 and the DJIA kept its pace, reaching 10,342 points. Equities moves were mainly affected by the currency market last week as large cap multinational stocks that are often affected by Forex fluctuations, led the way higher.

The markets started off on a solid note on Monday, after the G20 showed minimal concern with regards to the weakness in the US dollar.  US equity markets surged, with DJIA and S&P up 2.0% and 2.2%, respectively.  Financials and industrials outperformed which lead the markets higher. The main message from the weekend G-20 meeting was that governments would maintain and back strong stimulus efforts to those economies which are now moving in the right direction to deal with the current recession.

On Wednesday there was a plethora of economic data out of Asia which stimulated confidence that global growth was on the mend.  The impressive retail sales figure (up 16.2% y/y vs. 15.7% expectations and 15.5% in Sept) and industrial production (which accelerated from a 13.9% y/y pace in Sept to 16.1% in Oct vs. 15.5% expectations) helped bolster hopes China will help the global economy to gain further traction.  This, combined with the better than expected Japanese machine orders which grew more than twice as fast as expected in Sept, reinforced faith in the recovery. Orders were up 10.5% m/m, much more than the 4.1% expected.

The Equity markets continued to hold onto gains for the week as market participants awaited the Jobless Claims number out of the US, which was scheduled on Thursday.  The U.S. Labor Department said in its weekly report that initial claims for jobless benefits fell by 12,000 to 502,000 in the week ended Nov. 7. That was the lowest level since Jan. 3. The previous week’s level was revised to 514,000 from 512,000.  Although analysts were expecting a drop to 510,000, optimists were hoping for a fall below 500,000.  The result disappointed and resulted in some profit taking, which caused the equity indices to drop and the dollar to rise.

On Friday, the EMU released its GDP which came out slightly worse than expected.   Euro-zone gross domestic product grew 0.4% in the third quarter, after dipping 0.2% in the second. This was the first quarterly expansion since the first quarter of 2008. On an annualized basis, the contraction in GDP eased to 4.1% from 4.8% in the second quarter. Economists were expecting the first estimate of third-quarter GDP to show that the economy had expanded 0.6% on a quarterly basis and contracted 3.9% on an annual basis.

Forex:

Even though the Dollar showed relative strength last week, it failed to present any major moves, appearing to be running out of steam.  The euro lost ground after failing to sustain gains above $1.5000 and dropped towards the end of the trading week. Even though traders preferred to cash in on recent gains, the currency managed to stay above the $1.4875/85 area (around the 20-day moving average and 38.2% retracement of the recent rally).  The Euro zone industrial production data was somewhat disappointing, and increased by only 0.3% m/m in Sept (0.5% exp). On the upside, economic data also showed that Germany’s output jumped 3% in Sept and contributing to the slightly smaller than expected contraction in Germany’s GDP result for the third quarter.  Spain’s GDP also showed a better than expected result at -4.0% y/y vs. -4.1%. From a technical point of view, the Euro is now in danger of forming a double top, struggling advance above $1.50.  One must note that break below 1.48 could create a downdraft for the EUR/USD and lead to additional selling pressure.

The Australian dollar hit new highs for the year touching 93 cents against the US dollar.  Australian home approvals climbed by the most in six months in September, giving the RBA justification to hike rates in coming months. Though the central bank has pointedly used the word ‘gradual’ to describe the movement of interest rates in coming months, improving data continues to underpin speculation of sharper tightening.  The AUD/USD finished the week just under multi-year highs.

Pound came under pressure after the BoE’s King, commented after the release of the Quarterly Inflation report. The bank Governor talked about the benefits to the economy of a weaker pound and mentioned that it could help economic growth.  He also said he has an “open mind” on bond purchases, suggesting the BoE has not necessarily reached the end of Q/E.  The BoE said inflation is still expected to come in below the 2% target for most of the next 3 years before edging higher.  The Dovish comments had a negative impact on the sterling sending the cable down after posting hefty gains. Even though, fundamental data is pointing to further weakness, technical levels could hold strong, especially as the Sterling is now trading around prior resistance.

The week Ahead

Next week, a wave of data is going to be released, some of which will have a major effect on the intraday sessions.  On Monday the week will start off with US Retail sales and Business Inventories.  On Tuesday the market will need to absorb UK CPI and US PPI, Industrial Production and Capacity Utilization. During the week Australian Wage Price Index will be released, followed by UK BOE minutes and the closely watched US CPI figure. The number will be scrutinized by investors to make sure that inflation isn’t showing signs that could hurt economic growth. On Friday the BOJ will announce their interest rate decision. The bank is expected to hold at current levels of 0.1%.

We wish you successful trading!

Last Monday, IMF official hinted that the Dollar is not undervalued even when it had already drop 14% in this year. The market took the cue and spike on the Monday opening as traders capitalize on the weak dollars to scoop up more stocks. After the surge on Monday, the market hovers sideway for the rest of the week, as the earnings and economic news are light.

Consumer sentiment and the U.S. trade balance are the limelight for the week. Traders and investors are worried that the weak consumer sentiment will curb the spending on the holiday season with less than 40 days to go.

The Reuters/University of Michigan index of consumer sentiment fell to 66 in November, down from 70.6 in October. Analysts had been hoping to see the measure rise as high as 72 in the latest report. The negative numbers in the consumer sentiment will likely to weight on the market going ahead of the holiday season. In the coming holiday season, consumers will likely to buy only the quality and essential stuff for the celebration as some of the companies are still firing people in this week.

The U.S. trade balance widened more than expected in September, with import prices rising faster than export prices. The trade deficit widened to 36.5 billion in September, compared with expectations for an expansion to $32 billion, according to economists polled by MarketWatch. The Dollar suffered immediately after the release of the U.S. trade balance report. While the Dollar suffers losses, the rest of the markets such as equity, commodities and gold gained on the “Risk-On” trade.

Overall, the trading volumes in the market were below average throughout the week. The market basically went flat after the great start on Monday. Traders and investors were seen traded lightly as they are looking for the direction from the APEC meeting in Singapore later in the week.

Major Events

• Orion Bank closed as the federal deposit insurance fund take $1 billion hit.
• U.S. Trade balance widens more than 18%.
• Gold surge to a high of 1128 on Globex on Monday 16/11/09

Economic Data

There will be a glut of important economic data coming out in the coming week. The October U.S. Retail sales will be in the limelight and set the pace and sentiment for the week. Economist estimate a 1% seasonally adjusted increase in sales for October, a strong rebound after a 1.5% decline in September.

The street will be watching the inflation number from the Producer price index and the Consumer price index. The market will likely to feel the pressure from the Fed, if the data indicate a much stronger inflation reading.

Housing Start and Homebuilders’ index will shed more light in the process of the economy recovery. The October reports will be significant as the buyer and builders did not know that the Congress will extend the home-buyer tax credit past its Nov. 30 expiration and expanded it to repeat buyers.

Manufacturing data such as Industrial production, Capacity utilization and Philly Fed Index will be on the tap.

Lastly, the street will look at the weekly jobless claims and leading indicators to guide them for the rest of the year.

Earnings

The third-quarter earnings had finally come to an end in the coming week with the mildest profit decline in two years, easily topping low expectations, even as revenue growth is still out of reach.

80% of S&P 500 companies have beat analysts’ estimates for the third quarter, according to Thomson Reuters. Profits dropped about 14%, far better than in recent quarters.

While the street had an easy third quarter earnings expectation, the fourth quarter is likely to be a different story. This holiday season will hold the key for the fourth quarter earnings.

Summary

The streets had been watching on the leaders, especially from China at ongoing the APEC meeting in Singapore. The U.S. dollar and the Yuan issues had brought up at the meeting. One of the China official joint a renown Hong Kong businessman warn against the risk of the Asia asset bubble due to the ultra loose monetary policy in the United State of America.

The market will be watching closely on the economic data and looking for direction from the Fed Speeches in the coming week. However, the market will give number one priority to the U.S. Dollar, regardless of the economic data.
In conclusion, the market will likely to go higher as long as the Fed favor the cheap credit and refuse to tighten up the monetary policy. The market will continue to stay volatile in the coming week, as there are many economic data that are schedule to release. Furthermore, President Obama will likely to say something from his visit to the East.

Will we experience Santa Claus Rally in this year?

Sector Rotation

Last week, Consumer Discretionary (1.08%) after several companies being upgraded by analysts. Materials (1.01%) took the second spot followed by Technology (0.74%), Health Care (0.44%), Consumer Staples (0.34%), Industrials (-0.22%), Utilities (-0.27%), Financials (-1.08%) and Energy (-1.55%).

Gold continue to be in the limelight. Gold seem to be unstoppable in recent weeks as it making new high for the year. Everybody seems to love gold recently as it is the best investment tool currently. Gold offer the protection of weak dollar, a defensive play by nature and also benefit from the commodities rally.

While many people are buying gold, I would like to point out that Gold trade might be overbought recently. Alternative to gold, silver is another option to be considered. So far, Silver had not been in the limelight and it is at a better buying price than gold. Thus, Silver seems to be the best alternative for Gold trading.

In conclusion, Silver will likely to benefit from the rise of the Gold.

Technical Analysis

The S&P 500 Index closed at 1093 last week. This indicated a gain of 24 points (2.4%) from the previous week’s close.

The market had to thanks the Dollar for another great run for the week. The dollar weakens on Monday after the negative comments from the official. Traders and investors gladly took it on stride as it bid the market furiously on Monday.

The market continues to ignore the bad economic data such as consumer sentiment and IBD/TIPP Economic Optimism. The market look set to close higher for the year of 2009.

Technically, S&P 500 Index had blast through the 20 moving average and the 1075 level convincingly, indicated that the bullish momentum is still very strong. However, S&P 500 Index fail to establish itself above the 1100 level, will cap the movement of the bull. This week the market will likely to test 1100 level again, with the objective of establishing itself above the psychological level of 1100. Looking at the chart, S&P 500 Index failed to close above the red color trend line on Friday, might indicate that the bull have exhausted from the great run off the March low.

The street’s optimism and confidence in the market remain high after the officials stated that the Dollar is still slightly overvalued in the world. Throughout the week, most of the articles have pointed a weaker dollar for the next couple of months.

Looking at weekly candles, the S&P 500 Index is suggesting a pause. The weekly candle shows an ugly shooting star that indicates a reversal or pause in the coming week. The psychological level 1100 will likely to act as a strong resistant for the market.

Looking at daily candles, we also have an ugly shooting star candle signaling that the S&P 500 Index looks like it might be starting the week slightly to the downside. The market will likely to be flat.

The immediate support levels are S1: 1075, S2: 1050 and S3: 1025.
The immediate resistance levels are R1: 1100, R2: 1125 and R3: 1150.

In conclusion, the market this coming week is likely to be very volatile as there are many economic data that are schedule for releases. The market sentiment remain bullish and this likely means that the market will test the psychological level 1100. If the market able to establish itself above the psychological level in the coming week, it will be able to surge higher for the end of the year. The market will have to find support from the weak dollar as it propels itself higher in year 2009. Therefore, the weakness of the Dollar will be the key towards the bullishness of the market.

[Lawrence Chua]

The world celebrated the Dow Jones Industrial Average’s close above 10,000 level last Thursday. It took nearly a year to reclaim that important psychological level of 10,000.

The street had begun to question the strength of this market going into the next twelve months. Conservative investors are still showing doubts in the market while there are a growing number of traders and investors who believe that the recovery story is on the roll.

Conservative investors supported their argument by pointing towards the weak unemployment in the country. They also pointed out that the top line earnings still did not meet expectations. Furthermore, they cited that the regional banks are still suffering and small business could not manage to secure credit from these banks.

The other camp of investors and traders think that the recovery is already on the way. They cited that the market tends to lead the economy rather than vice versa. They also pointed to the fact that so far in quarter, companies that have reported their earnings results posted better than expected earnings. Their arguments are backed up by the fact that there are still many sidelined monies that will eventually come into the equity markets due to the weakness in the Dollar.

Looking at last week’s performance, the market had a great week with 4 out of 5 days registering gains. This great performance was fueled by the better than expected earnings results from notable companies such as JP Morgan Chase, Goldman Sachs, Intel Corp and Google Inc.

Easy Monetary policy also lent a helping hand to fuel the stock market growth for the past few weeks to months. Investors and traders will continue to do the re-inflation trade as long as the Fed maintains the easy credit policy.

The economic data was rather mixed last week. Sentiment reports such as the IBD/TIPP Economic Optimism and Michigan Consumer Sentiment shows that the reports came out worse than expected. However, the stronger than expected results from Retail Sales, Weekly Unemployment Claims and Weekly Crude Oil Inventory help to support the market.

Major Events

• California bank becomes 99th to fail in U.S. in 2009
• U.S. Dollar hit 14 months low
• Fed Chairman Bernanke hints that more stimulus package might hit the main street.

Economic Data

Investors and traders have been weighing earning results against the growth of the economy. This week, there are some important economic data that will make an impact on the market.

On Monday, the NAHB is due to post its October housing market index. Tuesday will bring in numbers from the September PPI, housing starts and building permits. On Wednesday we have the Fed Beige Book. Thursday brings weekly jobless claims and September leading indicators. Lastly on Friday, existing home sales data for September will be released.

Earnings

61 S&P 500 companies having reported earnings so far, with 79% topping analysts’ expectations, 11% having matched and only 10% have come in below expectations, according to Thomson Reuters.

So far, the earnings results have come out similar to the last quarter’s earnings with many companies beating lowered expectations.

Next week, another 75 S&P500 companies are due to report earnings along with 11 Dow components.

Among the highlights next week will be results from Apple Inc. due after the close of trading on Monday. Tuesday will bring, among others, Coca-Cola Co., Dupont, Pfizer Inc. and United Technologies Corp. Wednesday sees results from Boeing Co., Freeport McMoran, Morgan Stanley and Wells Fargo. On Thursday, results are expected from 3M Co., AT&T Inc., Credit Suisse Group, Dow Chemical Co., McDonald’s, Merck, and Travelers Cos. Microsoft Corp. are due to release its earnings on Friday.

Summary

Another week of better than expected earnings from the major companies. It has been the headline for the week as Goldman Sachs, JP Morgan Chase, Intel Corp. and Google Inc. smashed earnings records amid the slow economy.

The sentiment on the street has been surging along with the market recently. Many traders and investors seem to be comfortable in putting money into this market as it establishes itself above the psychological mark 10,000. Many of them are putting money into risky assets than holding the ever-depreciating Dollar in the near term. The correlation between the rising equity price and falling Dollar seems so obvious that even main street is shorting the Dollar to buy every other hard asset in the market.

The weakening Dollar so far has helped to boost earnings for the Conglomerates and helped the growth in exporting industries. However, the problem with a weakening Dollar will be a bigger bubble in the asset market and the loss of faith in the currency. The biggest problem of all will be Hyperinflation not too far down the road.

The coming week’s earnings results are likely to be the same as the previous week, showing better than expected grades. The market is likely to maintain its grip above the major psychological levels.

In conclusion, the market should stay higher in the coming week as long as companies post better than expected earnings results. The U.S. Dollar will be the main focus going forward. As long as the Fed maintains a loose monetary policy, the market should push higher. Any hints of dissatisfaction with the weak dollar will make the market very edgy.

Sector Rotation

Once again the Energy (3.64%) took the top spot to lead the market higher for the week followed by Industrials (2.11%), Materials (1.46%), Consumer Discretionary (1.4%), Consumer Staple (1.31%), Health Care (0.76%), Utilities (0.47%), Technology (0.43%) and Financials (-0.91%).

Same story again with the weakness in the Dollar – it continues to spur the growth in the commodities sectors such as Energy and Materials.

Financial and Technology sectors took a beating due to the “buy the rumor, sell the news” trade last week.

In conclusion, the market will continue to surge higher as long as the Dollar remains weak. The sectors that are likely to benefit from the weak Dollar will be Energy, Industrial and Materials.

Technical Analysis

The S&P500 Index closed at 1087 last week. This indicates a gain of 16 points (1.5%) from the previous week’s close.

The market had a run of 4 consecutive positive days in this week. The push on Thursday was fueled by the euphoria of getting above the 10,000 mark on the Dow Jones Industrial Average.

Technically, there are no signs of slowing down the bull after such a great run since March and July. The market had managed to close above the 50 Day Moving Average since 15th of July. Apparently, the market always seems to be able to find a buyer to bid up the price from the dip of the 50 MA level.

Looking at the daily chart, the market is going higher amid a slower pace as compared to the early stage of the bullish surge. The S&P500 Index will face a tough job to climb above the 1,200 mark for the end of this year.

Meanwhile, the street’s optimism and confidence in the market continues to push higher after the Dow Jones Industrial Average managed to establish a close above the 10,000 mark.

Many folks are likely to be more comfortable in putting their money in the market now as the fear of a double dip seems to have disappeared recently from the news. Furthermore, the media has been creating a lot of fear with regard to the depreciating value in the purchasing power of the U.S. Dollar.

Many people believe that the Dollar is going to fall further and are trying their best to safeguard their Dollar through investing in Gold, Oil, base metals and even good quality stocks.

Looking at weekly candles, the S&P500 Index is suggesting some upside movement if it can break above 1100 in the coming week. The weekly chart shows a healthy bullish candle that might translate into further gain in the coming week.

Looking at daily candles, the S&P500 Index looks like it might be starting the week slightly towards the positive side. The candle formation, a “hammer” on the rising trend tends to point toward a consolidation over the next few days.

The immediate support levels are S1: 1080, S2: 1060 and S3: 1040.
The immediate resistance levels are R1: 1100, R2: 1150 and R3: 1200.

In conclusion, the market this coming week is likely to be bullish if it can break above the 1100 level. Earnings will play a big part in deciding the fate of the market. The U.S. Dollar will also play another big part towards the growth in the equity market. Overall market sentiment remains bullish but the economic view is still bearish. Thus, the strategy in this market is go with the bullish flow but maintain a clear mind ahead of the economy situation.

It would be wise to not commit more than 50% of your cash to trading now. Buying yourself some insurance in the form of cheap Puts may not be a bad idea should the market decide that it has had enough of this bull-run.

It is October, after all.

[Conrad Alvin Lim]

Stocks Climb on Earnings, Currency Pairs Present Surprising Movements

Global equity markets soared last week, after strong earnings releases in the United States led the benchmark S&P 500 index to new highs for 2009.  The S&P 500 rose 16 points or 1.5% during the week, while the Dow Industrial index broke the psychological 10,000 level.  European indices such as the DAX and the FTSE made new highs for 2009, while Asian equity markets posted solid weeks after previously retracing from high level.

The markets started on a positive note on Monday, following the prior week’s rally in the equity markets.  The market leveled off on Tuesday prior to a wave of global economic releases and numerous earning releases from large caps. On Wednesday the markets shifted into high gear, after strong earnings numbers from Intel and JP Morgan (Tuesday evening and Wednesday morning respectively).

The markets also welcomed strong Retail sales on Wednesday which, excluding sales of autos and food sales, increased 0.5%. It was a welcome sign of consumer activity especially after one of the deepest downturns in history.  The headline number fell 1.5% in September with the end of the “cash for clunkers” program, but consumer spending rose in many categories, lifting hopes that the economic recovery is gaining momentum at the start of the holiday shopping season.

Global Economic Data Continues to Show Improvement

Also on Wednesday, Japan’s central bank held fast on interest rates, in an effort to spur lending and bolster the corporate-debt market. The ‘no change’ statement came despite recent improvement in the world’s second largest economy.  BOJ Governor Masaaki Shirakawa indicated that the central bank is still leaning towards stopping the purchasing of corporate debt as scheduled at the end of the year, though no formal decision was announced on the issue after a two-day policy board meeting.

In the United Kingdom, the number of people claiming unemployment benefits hit its highest level for more than 12 years in September, but the monthly rise was smaller than expected, hinting that the labor market may have seen the worst.  The number of people claiming Jobseeker’s Allowance benefit in September totaled 1.63 million, the highest level since April 1997, the Office for National Statistics said.

The euro zone saw its fourth straight monthly increase in industrial output in August, providing further confirmation that the region’s severe recession ended around the middle of 2009.  Industrial output in the 16 countries that have adopted the euro currency swelled 0.9% in August from July. The production data eased worries that the euro zone might slide back into contraction later this year or next, though some economists warned that growth would likely slow once government stimulus programs run their course.

The Pound Climbs Higher, USD/CAD at major Support

It was an interesting week for the sterling, climbing dramatically higher against the U.S Dollar. The Bank of England had a positive effect on the Sterling last week as Paul Fisher released an optimistic view on the UK’s situation, sending the GBP/USD six big figures higher for the week. Fisher said that the central bank may pause in its QE (quantitative easing) program and mentioned that he has confidence that the program is working as hoped. This came after a positive surprise in the jobless numbers. Even though the fundamentals for the pound are still negative, with interest rate differentials favoring other currencies, investors preferred the undervalued currency driving it up for the week. Next week’s Bank of England’s minute may ruin the party as analysts are expecting the bank to lay low for the moment and let its recent policy leak through the system.

From a technical point of view the GBP/USD bounced off trend line support and has now headed into range. Even though a minor trend line lies ahead, one could expect consolidation on this pair around current levels.

Similar to the British pound, the Japanese yen reversed during the course of last week.  The BoJ’s upgrade of the economy this week (the government assessment was more pessimistic) does not alter the view that BoJ rates will remain extremely accommodative for an extended period making the yen a primary funding currency.  The USD/JPY broke above its downtrend line (around ¥89.90) drawn off the dollar’s Aug peak, after establishing a base around ¥88.00 causing the 5 and 20 day moving averages to cross to the upside.  Yen losses are likely to shake out momentum traders that took advantage of the yen’s August and September rally.  With the yen uptrend abating, momentum traders, who pay to be long yen against higher yielding currencies, are likely to trim positions triggering further yen losses.  A break above ¥91.70 could present a long position to ¥92.90.

The Bank of Canada is scheduled to meet this week and is expected to stick to its previous statement; leaving rates unchanged thru mid-2010.  Concerns about C$ strength are unlikely to lead to an intervention, especially given limited potential for intervention success. Even though the chart is trading on weekly support, further Dollar weakness together with rising oil prices could lead this pair lower in the long term, to test support level 2.

The Week Ahead

Economic data will continue to have an effect on the intraday sessions this week. In the U.S the market will be watching construction output in the EMU and US NAHB housing index, two events that could cause movement.  Tuesday will also be an interesting day as the Bank of Canada will announce their interest rate decision.  With Australia paving the way, recently raising rates, the markets could be in for a surprise.

Furthermore, the second half of the week should be exiting as the US beige book, UK retail sales and Canadian retail sales are all expected to be released.  Friday’s session will be influenced by the big man’s comments (Ben Bernanke), mentioning the Fed’s outlook.

Hold your breath. It’s that time of the year … the time of the year when the market either makes it or breaks it. It’s Crash or Rally time.

We are all familiar with all the bad news that comes with this period of trading. Here’s a brief recap:

• 1929, Oct 24 (Black Thursday) The Great Depression
• 1929, Oct 29 (Black Tuesday) The Great Depression
• 1987, Oct 19 ((Black Monday)
• 1997, Oct 22 (Asian Financial Crisis) DOW lost more than 11% in 4 consecutive down days.
• 2007, Oct 10 – Start of the Sub-prime Mortgage Crisis Decline
• 2008, Oct 06 to 10 (Black Week) The “Panic of 2008?. DOW closes below 10,000 on Oct 6 for the first time since Oct 26, 2004
• 2008, Oct 09 & 15 2008 – DOW loses more than 7% on each day.
• 2008, Oct 24 (Black Friday) World markets lose more than 10% in one session

Now, also take note that when the market was at a bottom or recovering from a bottom, Octobers were great rally starters;

• 1921, October – After a three year low in August that year, DOW went on to gain 446% over the next 8 years that led into the Crash of ‘29.
• 1934, October – Having recovered from the Great Depression, the market gained 110% over the next 28 months.
• 1949, October – After finding a 4 year low in June, the market broke its 52 week high and started a 16 year bull run that took the DOW from 190 to 988 by Jan 1966.
• 1982, October – Dow breaks above 1,000 and gets above its 10 year high and starts a 5 year rally that extends beyond 150% before breaking down in October 1987.
• 1987, October – After that spectacular break down, Dow started an immediate recovery that went from 1,840 to 3,000 (63%) in 33 months and peaked out at 3,000 by July 1990.
• 1990 October – Dow pulled back from 3,000 in July 1990 to 2,365 by October that same year and found a bottom which rallied to 9,340 (294%) in 8 years, ending with the Russian Financial Crisis in 1998.
• 1998, October – The Russian Financial Crisis ended with a Double Bottom and rallied the DOW from 7,631 to 11,107 by May 1999 for a gain of 45.5% in only 7 months.
• 2002, October 10 – DOW found the Dot.com recession bottom at 7,286 and went into a 16 month recovery that topped out in February 11, 2004 at 10,737 for a 47% gain (albeit with a scare between January and March of 2003).
• 2005, October – Dow holds above 10,200 in a two year consolidation and breaks out the following November and makes a two year run to the all time high of 14,164 by October 9, 2007 for a 38.8% gain.

So what can we expect this time; Tank or Rally?

Dow, Nasdaq, S&P500, VIX, Dollar, 10yr, Oil, Nat Gas & Gold

This market is doing things I’ve never seen before and is making unprecedented patterns not seen in history;

The benchmarks are cracking new highs with the DOW breaking and holding above 10,000 and staying well above its 200DSMA while the VIX is at a 14 month low of 21.72 and the 10yr Treasury Yield’s two month decline indicating a return to a bull market.

But the dollar is at shark-shit lows, Oil is climbing unbelievably above $78 and Gold is no less crazy above $1,050 indicating an onset of inflation against the back drop of that weakening dollar while Natural Gas remains unnaturally and divergently low below $5.

And how is it logical to have inflationary commodity prices when Americans don’t have incomes, jobs and the kind of spending power to support $78 oil and $1,050 gold?

The economy is undoubtedly still very weak and the pain in America is still quite bad. The fundamentals of the country just don’t justify the rally we are seeing and it would be foolish and too soon to assume that the economy is truly in a recovery state. But the market can be a different factor altogether. Seldom in history has the economy led the market. Statistics show that the market has often led the economy, sometimes regardless of the economic fundamentals.

In recent times, the market rallied without really recovering from;

• the 1973/74 Oil Crisis and the dollar’s divorce from the gold standard,
• 1987 inflationary recession,
• the 1997 Asian Financial Crisis (economic recovery was lagging by then),
• the 2000 LTCM debacle,
• the Dot.com deflation the 2001,
• SARS in 2002
• and it would seem, now in 2009 during the Financial Crisis.

I have little faith that this rally is sustainable and will continue to hold on to my 20 year cycle theory. But what is undeniable is the money making opportunities that have presented themselves over the last 7 months. Markets will tank and markets will rally. What matters more than a bearish opinion is that one makes money regardless of that opinion. I find it foolish to hold to the market’s fundamentals and deny an “empty” rally that is so ridiculously profitable, hyped or not.

Missing out on a 53.7% rally does not an intelligent trader make.

At the same time, committing more than 50% of your cash to trading this rally is even more foolish. Knowing that the fundamentals will catch up with the market sooner or later, makes highly leveraged trading a dangerously foolish prospect for now. With most of the pros and high-leveraged players staying sidelined or playing it conservatively, taking on this market with guns blazing will get you killed as surely as the last mad rush by Butch Cassidy and the Sundance Kid.

Play it safe. Buy some insurance. Spread it. Hedge it. Trade this market bullishly by all means but always protect yourself and keep your stops tight. Better to get stopped out in small profits than risk wiping out half or all of your capital. If the market continues to run, at least you’re not missing out. If it tanks suddenly, you’re prepared for the worst. Calculate your risk and stick to your rules. Don’t think about it when the shit hits the fan – just do it and take the pain. It’s a short stab and it’ll hurt. But like all bitter medicine, it is a good thing.

Remember that this rally is fuelled by ignorance and hype. Such “buy the rumor, sell the news” investors have been responsible for some of the worst market bubbles in the history of the stock market. And you know what always follows a bubble.

The property scene in Singapore is no different. What makes this bubble even more hazardous is that these investors are flipping with borrowed money. God forbid a property market correction – banks are going to be holding a large portion of our housing inventory then and owners are going to be paying for mortgages that are above the lower selling price – defaults will surely rise.

In parting, allow me to leave you with a wise quotation by Joseph Patrick Kennedy from 1929;

Even when shoe shine boys are giving you stock tips, it’s time to sell.

Have a great weekend!

[Conrad Alvin Lim]