US stocks rose on Tuesday after United Parcel Service (UPS) and DR Horton released encouraging earnings reports.

Gains were broad based on Tuesday, with 28 of 30 Dow stocks rising.

UPS reported a drop in fourth-quarter profit, but forecast a sharp increase in 2010 earnings. Its stock rose over 1%.

The National Association of Realtors’ pending home sales index rose 1%, in line with expectations. The index fell 16.4% in the previous month. DR Horton, one of the top five US home builders, reported its first-quarterly profit in almost three years and its stock jumped 11%. Pulte Homes and Lennar Corp rose over 7%.

Amazon.com slid for a second straight day, falling 2%, and limited the Nasdaq’s advance.

The S&P 500 industrial sector rose over 1%. Cummins and Emerson Electric rose between 7% and 8%. Cummins is a US manufacturer of diesel engines and other power generation equipment. Emerson is an industrial conglomerate that produces technology used by the oil and natural gas industries.

Major automakers, including Ford Motor, General Motors and Nissan all reported improved January sales. Toyota, however, saw a bigger-than-expected decline in January sales, impacted by a major recall.

Credit card companies rose after analysts upgraded companies within the industry. American Express, Discover Financial Services and Capital One Financial rose between 2% and 3%.

So far, 48% of the S&P 500 companies have reported results. Analysts expect earnings to have tripled from the prior year, although the improvement is mostly due to cost cutting and easy comparisons to the fourth quarter of 2008. The financial sector is expected to lead the advance.

In other news, Moody’s Investors Service said the outlook for the US’ AAA credit rating remains stable even with the effects of the credit crisis and recession on government debt and fiscal flexibility.

Commodities

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Market breadth was negative. On the NYSE, losers beat winners by more than three to one. On the NASDAQ, decliners topped advancers three to one.

Commodity-related shares were hurt by concerns that China may curb its economic expansion. A stronger dollar also put pressure on commodity prices and commodity-related stocks.

Technology shares were among the biggest decliners after IBM gave a conservative outlook, despite reporting better-than-forecast quarterly sales and earnings. IBM shares fell 3.8%.

Healthcare stocks were down on Wednesday. An index of pharmaceuticals companies fell 1.1%. Healthcare stocks had risen the prior day on speculation that the healthcare system would face new obstacles following a surprise Republican election to the Massachusetts Senate seat.

Several banks reported earnings. Wells Fargo & Co and US Bancorp reported better-than-expected quarterly earnings, helped by recent acquisitions. The Bank of America reported a wider-than-expected loss, but said its credit problems were beginning to stabilise. The Bank of America said losses widened to US$5.2B in the fourth quarter of last year, partly due to the bank paying back government bailout funds. The company said the repayments shaved off $US4B from its bottom line. US Bancorp shares added 2.3% while the Bank of America gained 0.6%. Morgan Stanley reported its second-straight quarterly profit, one year after posting a significant loss. The financial firm said it earned US$617M for the quarter versus a loss of $11B a year ago. The result missed expectations, and shares in the company fell around 1%.

In economic news, building permits, a measure of builder confidence, rose to a 653,000 unit annual rate in December, from a 589,000 rate in November, the government reported. Permits were expected to rise to a 590,000 rate, according to a consensus of economists. However, housing starts fell to a 557,000 unit annual rate, from a 580,000 unit rate in November.

The Producer Price Index (PPI), a measure of wholesale inflation, rose 0.2% after climbing 1.8% in the previous month. Economists expected it to hold steady. The so-called core PPI, which strips out volatile food and energy prices, was flat versus forecasts for a gain of 0.1%.

Overseas Markets

Dow down 137 pts to 10,588 (10,517 – 10,720)

S&P 500 down 14 pts to 1,136 (1,129 – 1,148)

Nasdaq down 33 pts to 2,287 (2,269 – 2,304)

SPI 200 Futures down 31 pts to 4,806 (4,776 – 4,840)

FTSE down 92 pts to 5,421 (5,404 – 5,513)

Nikkei down 27 pts to 10,738 (10,725 – 10,861)

Shanghai SE Comp down 95 pts to 3,152 (3,148 – 3,255)

Commodities

WTI Oil down 2.0% to US$77.43/bbl

Gold down 2.4% to US$1,113/oz

Sugar (NY) up 0.4% to USc29.11/lb

Corn down 0.3% to US$3.32/bushel

Wheat down 0.6% to US$4.67/bushel

Natural Gas (Henry Hub) up 0.6% to US$5.54/MMbtu

Silver down 4.5% to US$17.91/oz

Platinum down 0.9% to US$1,630/oz

Palladium up 0.6% to US$469.25/oz

Copper (NY) down 2.6% to US$3.35/lb

Currency

A$ / US$ down 1.7USc to US$0.91 /A$

EUR / US$ down 2.8USc to US$1.41 /EUR

GBP / US$ down 0.6USc to US$1.63 /GBP

US$ / Yen up 0.5 Yen to 91.24 Yen/US$

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The S&P Healthcare Index climbed nearly 2%. Drug maker Eli Lilly rose 5%. Health insurers Humana and Aetna gained 3.6% and 4%, respectively.

All 10 S&P 500 industry groups traded in positive territory.

The Dow also received a boost from McDonald’s, which gained 2.3% on an analyst upgrade. 3M was another notable mover, rising 2%.

Kraft Foods was the biggest drag on the Dow, declining 1.1% after it agreed to a revised cash-and-stock deal to buy Cadbury for about US$19.6B.

In other deal news, Tyco International agreed to buy Brink’s Home Security Holdings for US$1.9B. Brink’s shares surged almost 31.6%.

Large-cap technology companies buoyed the NASDAQ. IBM is expected to report its quarterly earnings after market close. Apple was up 4.2% while IBM advanced 1%.

Citigroup reported a fourth-quarter loss that met analysts’ expectations as the third-largest US bank took charges linked to repaying government bailout funds. On the upside, the company said consumer credit losses dropped in the quarter and that it also set aside less money for bad loans during the quarter. Shares gained 3%.

The Bank of America and Morgan Stanley will report on Wednesday. Goldman Sachs and Google will report earnings on Thursday.

S&P 500 earnings are expected to have almost tripled versus those a year ago and revenue is expected to have risen 7%. However, the jump is largely due to a spike in financial sector results versus an easy comparison to the fourth quarter of 2008 amid the height of the financial crisis. Without the financial sector, earnings are expected to be down 8% and revenue is expected to decline 1%.

Overseas Markets

Dow up 116 pts to 10,725 (10,592 – 10,730)

S&P 500 up 14 pts to 1,150 (1,136 – 1,150)

Nasdaq up 31 pts to 2,319 (2,291 – 2,320)

FTSE up 19 pts to 5,513 (5,431 – 5,532)

Nikkei down 90 pts to 10,765 (10,749 – 10,867)

Shanghai SE Comp up 10 pts to 3,247 (3,237 – 3,269)

Commodities

WTI Oil up 0.8% to US$78.66/bbl

Gold up 0.7% to US$1,138/oz

Sugar (NY) up 4.9% to USc28.98/lb

Corn down 2.6% to US$3.33/bushel

Wheat down 1.7% to US$4.70/bushel

Natural Gas (Henry Hub) down 2.7% to US$5.51/MMbtu

Silver up 1.0% to US$18.82/oz

Platinum up 1.7% to US$1,650/oz

Currency

A$ / US$ up 0.1USc to US$0.92 /A$

EUR / US$ down 0.9USc to US$1.43 /EUR

GBP / US$ up 1.1USc to US$1.64 /GBP

US$ / Yen up 0.4 Yen to 91.14 Yen/US$

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Major US companies reporting later this week include the Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, IBM, General Electric and Google.

European shares rose, lifted by a rally in mining and oil shares on the back of firmer commodity prices.

National benchmark indexes gained in all of the 18 western European markets, except Greece, Iceland and Luxembourg. Across Europe, Britain’s FTSE 100, Germany’s DAX and France’s CAC 40 rose between 0.7% and 0.8%.

Trading was subdued, as US markets were closed for the Martin Luther King Day. Volumes on the European index were just 65% of its 90-day daily average volume.

Miners topped the gainers’ list as commodity prices advanced. BHP, Anglo American, Antofagasta, Rio Tinto, Xstrata and Eurasian Natural Resources rose between 1% and 4%.

Cadbury rose 1.8% on media reports that the Kraft Foods will increase its offer to at least 820 pence per share. Kraft Foods must make a revised bid for Cadbury by Tuesday. The Hershey Co., which is reportedly working on a possible bid as well, has until Saturday to make a bid under UK takeover rules.

International Power dropped 3.4% after saying talks with GDF Suez on combining some assets are no longer continuing. The biggest UK-based electricity producer had earlier rallied on speculation that GDF Suez is considering a tie up with International Power that may lead to a partnership.

Greece’s ASE Index slid 2.5%. Finance ministers from the 16 nations using the euro are meeting in Brussels as Greece struggles to cut a 2009 budget deficit that may reach almost 13% of GDP. Among notable movers, Titan Cement, Greece’s largest cement maker, sank 7.9%. Alpha Bank, the country’s third-largest bank, tumbled 7.7%.

L’Oreal, Nokia and Zodiac Aerospace advanced on analyst upgrades. L’Oreal added 2.1%, Nokia was up 1.6% and Zodiac Aerospace gained 5.4%.

Overseas Markets

FTSE up 39 pts to 5,494 (5,454 – 5,504)

Nikkei down 127 pts to 10,855 (10,781 – 10,895)

Shanghai SE Comp up 13 pts to 3,237 (3,202 – 3,238)

Rio Tinto plc up 0.89% to A$63.68 eq.; a 19% discount to prev Aust close A$78.32

BHP plc up 1.47% to A$36.54 eq.; a 16% discount to prev Aust close A$43.44

Commodities

WTI Oil down 1.8% to US$78.00/bbl

Gold up 0.3% to US$1,134/oz

Silver up 1.2% to US$18.64/oz

Platinum up 1.4% to US$1,622/oz

Currency

A$ / US$ down 0.5USc to US$0.93 /A$

EUR / US$ down 1.1USc to US$1.44 /EUR

GBP / US$ down 0.1USc to US$1.63 /GBP

US$ / Yen down 0.5 Yen to 90.74 Yen/US$

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The “frost” premium that helped drive energy prices higher at the beginning of the month has begun to evaporate as forecast for milder weather combined with another rise in inventories has taken prices lower. Market moves caused by weather shocks are by nature temporary but the surge in demand has helped reduce booming inventories somewhat.

The Energy information Administration (EIA) this week released their monthly OPEC surplus oil production capacity data. Excluding Nigeria and Iraq they now have 4.7 million barrels per day of surplus capacity, the highest level since 2002.

Despite robust demand from Emerging markets the slower than expected recovery among the developed economies leaves little room for further upside near term. With the current surplus capacity OPEC has signaled satisfaction with current price levels knowing that higher prices might damage the ongoing slow recovery. On top of this we have the risk of potential overheating of the Chinese economy, something that the government took the first steps to address this week by reining in lending , and raising the cost of funds for lenders.

The long awaited report from the CFTC on how they would curb excessive risk taking in energy markets were released on Thursday. The new rules would affect crude oil, natural gas, heating oil and gasoline but as it turned out the new limits would probably only impact the ten biggest position holders. So a pretty measured response with the main impact being felt by hedge funds and index-funds.

Technically Crude Oil for near month delivery made a new 15 months high at USD 83.95 but the subsequent strong sell off indicates that the market is not currently ready for an attempt on USD 85 and beyond. Considering the 18.5% rally since the middle of December last year a correction was overdue. We are currently looking for USD 78.08 and USD 76.27 as good support levels in a market that increasingly looks like it wants to range trade around USD 80 until we see further reduction in the overhang of supply.

The Gold rush of 2009 was put into perspective this week as a leading precious metals consultancy said that the investment demand for gold had doubled to 1,820 tons last year, while jewellery purchases fell 23% to 1,687 tons. This is the first time in three decades that investment demand exceeded that of jewellery demand and it highlights the huge role that investors played in driving gold to a record high in 2009.

Jewellery demand is expected to stay subdued above USD 1,000 according to traders, which puts the focus firmly on the need for continued investment demand in order to drive prices higher over the coming months. Global mine supply only rose by 6% to 2,553 tons, a six year high while net sales from central banks dropped 90% to 24 tons, the lowest level in more than twenty years.

Overall new net investments into commodities rose by USD 50 billion, a new record according to JP Morgan. It illustrates clearly how this growing asset class is being viewed by investors and currently the expectations are for a similar amount to be invested into the sector in 2010.

Gold like energy prices failed to hang onto the gains made early this week. On one hand it is being supported by continued investment interest but worries about a potential revival of the dollar on the back of European woes could hurt the EUR and thereby potentially gold as well. The economic problems facing countries around the Mediterranean and Ireland is well known and a continuation of the dollars month long slide can no longer be taken for granted.

Gold/silver ratio:

Overall the uptrend is still intact above USD 1,055 but gold looks to be in a consolidation phase for the time being. Look for support towards USD 1,115 followed by USD 1,086 and resistance at USD 1,146 and USD 1,162. Silver meanwhile has managed to hold onto its recent gains showing a near 11% gain so far this month with USD 18 proving to be a major support level. The gold to silver ratio has dropped from 65 to 61.2 currently with additional room for silver outperformance down towards 60.

The major moves of the week took place among grain and oilseeds products which tumbled on Tuesday after the USDA released their WASDE report (World agricultural supply and demand estimates), in which they surprisingly raised yield forecasts to record highs. Planting delays last year which delayed the growth window were more than offset by a mild summer and a warm dry September which helped the delayed crop to maturity.

This surprise change in forecast prompted a dramatic sell off across the board with Corn reaching the allowed down limit for the day and continued lower the following day. Because the US exports half the world’s corn, a third of the world’s soybeans, and a fifth of the world’s wheat, changes in output there have a major impact on global prices.

The reason why the upward revision came as such a surprise is due to the bad weather that the Midwest has experienced during these past few months. For exact this reason some worry that the next figures due in March could be revised lower as a portion of this season’s corn crop remains stuck in the ground due to unusually wet weather.

We see some upside to Corn now after speculative long positions have been reduced but favor a relative value trade versus wheat around the current ratio of 0.72 going for a target towards 0.79. Corn will be supported by the continued use in ethanol production while wheat supplies are abundant.

Corn/Wheat ratio

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Market breadth was positive. On the NYSE, winners beat losers by four to three. On the NASDAQ advancers topped decliners eight to five.

The technology sector led gains on the back of positive brokerage comments on Oracle and ahead of an expected profit report from Intel. Shares of Oracle, the world’s second largest business software maker, gained 2.5% and led gains on the NASDAQ. Dow component Intel Corp, the world’s largest chipmaker, is expected to report a quarterly profit after market close. Its stock advanced 1.6%. Analysts expect the company to report earnings of 30cps, compared with 4cps in the previous year. IBM and Hewlett-Packard shares also advanced.

The KBW bank index was up 1.4%, led mainly by regional and midsize banks. President Obama proposed a fee to make big banks repay taxpayers for bailouts. Bank shares had declined earlier in the week on concern about the fee, but on Thursday the sector was higher.

On the downside, US economic data appeared to cast doubt on the strength of the economic recovery. Sales at US retailers unexpectedly fell in December and applications for jobless benefits rose last week. A government report showed that retail sales fell 0.3% in December. Economists were expecting sales to have risen 0.5%. Retail sales excluding autos fell 0.2% versus expectations of a 0.3% rise. Helping to soften the blow, the National Retail Federation said holiday sales for the November – December period rose 1.1%, which was better than the retail group’s expectations for a 1% decline.

The number of American’s filing new claims for unemployment rose last week to 444,000 from 433,000 the previous week. Economists expected claims would rise to 437,000. Continuing claims, a measure of Americans who have been receiving benefits for a week ore more, fell to 4.596M from 4.897M in the previous week.

On the positive side, business inventories rose slightly more than expected in November, up 0.4% as businesses re-stock.

Overseas Markets

Dow up 34 pts to 10,715 (10,667 – 10,724)

S&P 500 up 3 pts to 1,149 (1,144 – 1,150)

Nasdaq up 11 pts to 2,319 (2,303 – 2,323)

Russell 2000 up 3 pts to 647 (642 – 648)

SPI 200 Futures up 11 pts to 4,890 (4,874 – 4,899)

FTSE up 25 pts to 5,498 (5,473 – 5,522)

Nikkei up 173 pts to 10,908 (10,774 – 10,910)

Shanghai SE Comp up 43 pts to 3,216 (3,166 – 3,219)

Commodities

WTI Oil down 0.3% to US$79.39/bbl

Gold up 0.4% to US$1,141/oz

Sugar (NY) down 1.0% to USc27.76/lb

Corn down 0.9% to US$3.45/bushel

Wheat down 1.8% to US$4.95/bushel

Natural Gas (Henry Hub) up 2.8% to US$5.77/MMbtu

Silver up 0.4% to US$18.71/oz

Platinum up 2.1% to US$1,612/oz

Palladium up 5.3% to US$447.13/oz

Copper (NY) down 0.3% to US$3.38/lb

Currency

A$ / US$ up 1.1USc to US$0.93 /A$

EUR / US$ up 0.1USc to US$1.45 /EUR

GBP / US$ up 1.6USc to US$1.63 /GBP

US$ / Yen up 0.1 Yen to 91.07 Yen/US$

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Market breadth was positive. Winners beat losers over two to one on both the NASDAQ and the NYSE.

The healthcare sector was buoyed by a brokerage upgrade of drug maker Merck & Co. Shares in Merck & Co rose 4.4%.

The consumer sector was aided by an upbeat outlook from Kraft Foods, gaining 0.4%. Chocolate maker Hershey is still considering a potential bid for Cadbury, but has not decided whether it will proceed with a formal offer.

JPMorgan, up 1.8%, led gains in the KBW bank index. JPMorgan reports its results later this week. In other news in the sector, the White House is debating taxing companies that took bailout funds to make sure they pay the money back. President Obama is expected to announce the plan on Thursday.

Tech shares gained, with Advance Micro Devices up 5.3% and Intel adding 1.5%. The semiconductor index gained 1.2%.

Google fell 0.9% after the company said it may shut down its China operations over censorship and hacking. Google said on Tuesday it may shut down its Google.cn site after discovering an attempt to gain access to Gmail accounts of Chinese human rights activists. The company said it is one of at least 20 companies that have been attacked. Shares of rival Chinese search engine Baidu jumped 13% and had the biggest percentage gain on the NASDAQ 100. According to figures from tracking firms comScore and Analysis International, Baudi currently controls 64% of the search market in China while Google has 31% of the market.

Energy stocks were under pressure as crude prices slipped. Chevron was the biggest drag on the Dow, falling 0.9%.

The Federal Reserve said in its Beige Book report of economic conditions that while economic activity was at a low level, conditions have improved modestly, and those improvements were broader geographically compared with the last report.

The December Treasury budged showed a deficit of US$91.9B versus $120.3B in November, roughly in line with forecasts for a deficit of US$92B.

Overseas markets

Dow up 74 pts to 10,702 (10,614 – 10,709)

S&P 500 up 11 pts to 1,148 (1,133 – 1,148)

Nasdaq up 30 pts to 2,312 (2,274 – 2,313)

SPI 200 Futures up 27 pts to 4,879 (4,826 – 4,879)

FTSE down 25 pts to 5,473 (5,451 – 5,510)

Nikkei down 144 pts to 10,735 (10,730 – 10,867)

Shanghai SE Comp down 101 pts to 3,173 (3,165 – 3,233)

Commodities

WTI Oil down 0.9% to US$80.08/bbl

Gold up 0.7% to US$1,138/oz

Sugar (NY) up 2.5% to USc28.04/lb

Corn down 8.7% to US$3.48/bushel

Wheat down 6.7% to US$5.02/bushel

Natural Gas (Henry Hub) up 0.7% to US$5.61/MMbtu

Silver up 2.1% to US$18.63/oz

Platinum up 0.4% to US$1,577/oz

Palladium up 0.0% to US$424.00/oz

Copper (NY) up 1.5% to US$3.39/lb

Currency

A$ / US$ down 0.6USc to US$0.92 /A$

EUR / US$ down 0.1USc to US$1.45 /EUR

GBP / US$ up 1.7USc to US$1.63 /GBP

US$ / Yen down 0.6 Yen to 91.48 Yen/US$

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Banks led the financials sector lower. The KBW bank index was down nearly 2%. Shares of the Bank of America, Citigroup and JPMorgan were off by between 3% and 4%. A senior US official confirmed that the government is considering a levy on financial services firms to recoup bailout losses as part of the fiscal 2011 budget. The banking sector faced another potential hit after the Federal Deposit Insurance Corp floated a proposal that banks whose compensation plans encourage risk-taking would have to pay more for deposit insurance.

Shares of Alcoa fell 11% after the company reported weaker-than-expected results. The company reported a profit of 1cps versus a loss of 28cps a year ago. However, analysts expected earnings of 6cps.

Chevron Corp said its fourth-quarter profit would be sharply lower than that in the previous quarter, sending its shares down nearly 1%. Margins have been under pressure, with the rising price of oil not in sync with the weaker demand globally. A variety of oil stocks fell, with the Amex Oil index losing 2.3%.

Shares of big manufacturers retreated, with Caterpillar sliding nearly 3%.

KB Home reported a quarterly profit for the first time in two years, thanks to a tax benefit. However, the homebuilder’s revenue dropped from that a year ago.

Technology shares also fell, including Apple, which was off 1.6%. Electronics Arts cut its fiscal 2010 forecast, citing weak holiday sales in Europe. The video game publisher lost 8.3%.

Intel and JPMorgan report results this week.

The November trade deficit, released in the morning, widened to US$36.4B, from a revised $33.2B in October. The deficit was expected to widen to US$34.5B.

Overseas markets

Dow down 66 pts to 10,598 (10,569 – 10,663)

S&P 500 down 14 pts to 1,133 (1,132 – 1,144)

Nasdaq down 35 pts to 2,278 (2,273 – 2,299)

Russell 2000 down 10 pts to 634 (634 – 644)

SPI 200 Futures down 52 pts to 4,839 (4,828 – 4,906)

FTSE down 39 pts to 5,499 (5,460 – 5,550)

Nikkei up 81 pts to 10,879 (10,764 – 10,905)

Shanghai SE Comp up 61 pts to 3,274 (3,180 – 3,275)

Commodities

WTI Oil down 2.4% to US$80.55/bbl

Gold down 2.0% to US$1,129/oz

Sugar (NY) up 2.3% to USc27.36/lb

Corn down 0.3% to US$3.81/bushel

Wheat down 6.7% to US$5.02/bushel

Natural Gas (Henry Hub) down 3.5% to US$5.57/MMbtu

Silver down 1.7% to US$18.24/oz

Platinum down 1.4% to US$1,569/oz

Palladium down 2.1% to US$425.25/oz

Copper (NY) down 2.7% to US$3.34/lb

Currency

A$ / US$ down 0.5USc to US$0.92 /A$

EUR / US$ up 0.8USc to US$1.45 /EUR

GBP / US$ up 1.4USc to US$1.62 /GBP

US$ / Yen down 1.7 Yen to 90.97 Yen/US$

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Market breadth was mixed. On the New York Stock Exchange, winners beat losers eight to seven. On the NASDAQ, decliners topped advancers seven to six.

China’s strong trade data lifted US companies with large international operations. Constructions machinery maker and Dow component Caterpillar jumped 6%, its largest daily advance in nearly three months. Aluminium producer Alcoa rose 1.2% ahead of its fourth-quarter earnings announcement expected after market close. Analysts, on average, expect Alcoa to show a profit of 6cps compared to a loss in the previous quarter.

Dow components Intel and JPMorgan report results later this week. S&P 500 earnings are expected to have more than tripled in the fourth quarter of 2009, thanks to easy comparisons to the fourth quarter of 2008. A substantial improvement in financial sector results is expected to fuel gains.

McMoRan and Energy XXI shares jumped after the energy companies announced a key discovery at one of their oil exploration wells in the Gulf of Mexico.

Technology shares, however, weighed on the market. Shares in Apple, Dell and Hewlett-Packard all declined.

UPS and Fedex advanced 4.8% and 2.9%, respectively, on speculation that cold weather affecting parts of the US will drive consumers away from stores and into online shopping, increasing shipment volumes.

Among decliners, Dow component Procter & Gamble shares fell 0.4% on concern that Friday’s currency devaluation in Venezuela could hurt sales and revenue as products will be more expensive.

Overseas Markets

Dow up 48 pts to 10,666 (10,592 – 10,676)

S&P 500 up 2 pts to 1,147 (1,142 – 1,150)

Nasdaq down 5 pts to 2,312 (2,302 – 2,326)

SPI 200 Futures up 6 pts to 4,939 (4,916 – 4,958)

FTSE up 4 pts to 5,538 (5,528 – 5,600)

Nikkei up 117 pts to 10,798 (10,678 – 10,816)

Shanghai SE Comp up 17 pts to 3,213 (3,197 – 3,307)

Commodities

WTI Oil down 0.3% to US$82.52/bbl

Gold up 1.2% to US$1,152/oz

Sugar (NY) down 2.8% to USc26.75/lb

Corn up 1.6% to US$3.82/bushel

Wheat up 1.7% to US$5.38/bushel

Natural Gas (Henry Hub) down 12.0% to US$5.77/MMbtu

Silver up 0.8% to US$18.62/oz

Platinum up 1.1% to US$1,596/oz

Palladium up 1.3% to US$433.75/oz

Copper (NY) up 1.2% to US$3.43/lb

Currency

A$ / US$ up 1.4USc to US$0.93 /A$

EUR / US$ up 2.2USc to US$1.45 /EUR

GBP / US$ up 1.7USc to US$1.61 /GBP

US$ / Yen down 1.3 Yen to 92.07 Yen/US$

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“Historically, when silver gets going, it tends to make huge percentage moves. I think you can see that from the long-term chart below. For instance, back in November 2008, silver was selling for 8.65 an ounce. Today an ounce of silver is selling for 18.10 an ounce, more than double.

“Silver is now climbing back from a drastic correction, as you can see via the chart below. In December silver hit a high of over 19 dollars an ounce. Back in 1980 (and I remember this well) silver climbed wildly (limit up day after day), and it hit $50 dollars an ounce around January of 1980.

“Silver is now in an erratic bull market. How high it may go I don’t know, but I would not be shocked to see silver ultimately climb above its 1980 price of $50 bucks an ounce. Historically, once ounce of gold will buy around 15 ounces of silver. Today an ounce of gold will buy 62 ounces of silver. Silver compared with gold is dirt-cheap today.

“How to invest in silver? I like the 100 ounce bars if you can find them (they weigh about 8.5 pounds each). Or buy the 10 ounce bars. Or you can buy the exchange traded fund SLV.

“Yesterday, both gold and platinum closed at new highs for the move. Silver is lagging behind, but when silver finally catches up, it may be a stunner. Over the last year the price of silver doubled; gold didn’t perform that well.

“Below I show a point & figure chart of silver. The white metal is now in a well-established rising trend. The upside target is the 21 box. If silver hits the 22 box, that will light the fuse. If silver hits the 22 box, I will view the whole structure that you see on this chart as one huge base.

“To put it briefly, I like silver. Gold has one advantage over silver, every central bank owns some gold, and most want more.”

Source: Richard Russell

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This time of year everyone from hedge funds through to the private investors get back into the markets looking for profitable investment opportunities. Given the strong performance of commodities in 2009 where the CRB index rose by 30% and investment flows into the sector rose by more than USD 60 billion it was and is expected that the sector will have another year with positive returns.

Friday’s unemployment data showed another steep drop in unemployment and gave the market a clear indication that the recovery among developed nations could become a long drawn out event and that we have to look towards the emerging economies for support.  

On that note speculation emerged during the week that the Chinese government would begin to tighten their monetary policy to reduce inflationary risks after a record gain in lending. This could lead to a reduced demand for raw materials and will be watched very closely once it occurs.  What it highlights is that the risk of reversals despite the general bullish attitude to commodities is ever present.

These expectations combined with very cold weather this winter have meant that particularly the energy sector began the week strongly with Crude testing the 2009 highs and Heating Oil breaking well clear and making new highs.  Crude Oil began its rally three weeks ago rallying 18% to a new high of USD 83.52 before profit taking occurred before and after the US unemployment data. The weekly storage numbers did not have a major impact but the cold weather no doubt have given market bulls an extra argument for buying the black gold.

Technically WTI Crude Oil for February delivery reached overbought territory during the week which left the market exposed to a correction. Given the current weather situation support should not be far away. Initial support is located at USD 80 which also coincides with the level OPEC has seen as being sustainable and acceptable given the current economic level of activity. Below that next level is USD 77.80 followed by USD 76.05. Resistance can be found at USD 83 followed by the psychological level of USD 85 and trend line at USD 87.10.

Gold began the week with less conviction than the energy sector but the strong correction seen towards the end of 2009 has given new buyers a better level to enter and some upside pressure to prices was seen during the week. Resistance at USD 1,142 ahead of 50% retracement of the recent sell off at USD 1,151 needs to be negotiated before a new attack on the USD 1,200 level can be initiated. Before that happens look for the market to range trade with support coming in at USD 1,171 ahead of USD 1,142.

 HG Copper continued its strong 2009 performance into 2010 reaching USD 350 on weather and a strike at Codelco, the world’s largest Copper producer before profit taking and the news about a potential fiscal tightening in China saw sellers emerge. The impressive rally that began back in March 2009 looks intact as long we stay above the December high at USD 325.

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Volume was light on the NYSE. Advancing stocks outnumbered declining ones on the NYSE by a ratio of about three to two, while advancing stocks beat decliners on the NASDAQ by about seven to four.

Data from the Labour Department showed that 85,000 jobs were cut in December. Analysts expected no non-farm job losses in December from the previous month. However, analysts noted that monthly job losses have declined sharply since the height of the recession. In addition, November’s payrolls report was revised to show a gain of 4,000 jobs, versus the initially reported loss of 11,000. The unemployment rate, generated by a separate survey, held steady at 10%, in line with forecasts.

UPS gave support to the market after it boosted its fourth-quarter outlook and said it will cut 1,800 jobs. Its shares rose nearly 5%. The news also sent shares of rival Fedex Corp higher by 2.5%. It also boosted investor optimism for the reporting season, which starts Monday with Alcoa reporting its results.

On the NASDAQ, biotechnology companies were in favour. Teva Pharmaceutical Industries gained 4.4% after the drug maker set a revenue target of 2015 of US$31B, more than double its current annual amount.

Among other biotechnology companies, Genzyme Corp advanced 5.2% on speculation that billionaire investor Carl Icahn was considering a proxy battle at the biotech company.

The first week of the year got off to a positive start. For the week, the Dow rose 1.8% the S&P 500 added 2.7% and the NASDAQ rose 2%.

In other economic news, wholesale inventories rose 1.5% in November after rising 0.6% in October. Economists expected inventories to fall 0.3%. Another report showed consumer borrowing fell by US$17.5B in November versus expectations of US$5B. Borrowing was down US$3.5B in the previous month.

Since the start of the year, analysts have revised up their earnings estimates for all S&P sectors except healthcare, financials and consumer staples.

Overseas markets

Dow up 11 pts to 10,618 (10,554 – 10,619)

S&P 500 up 3 pts to 1,145 (1,136 – 1,145)

Nasdaq up 17 pts to 2,317 (2,291 – 2,318)

Russell 2000 up 3 pts to 645 (640 – 645)

SPI 200 Futures up 30 pts to 4,925 (4,887 – 4,925)

FTSE up 8 pts to 5,534 (5,495 – 5,549)

Nikkei up 117 pts to 10,798 (10,678 – 10,816)

Shanghai SE Comp up 3 pts to 3,196 (3,149 – 3,199)

Commodities

S&P 500 Metals & Mining Index up 5.3pts (2.8%) to 192.4

Sugar (NY) down 1.7% to USc27.53/lb

Corn up 1.6% to US$3.82/bushel

Wheat up 2.1% to US$5.29/bushel

Natural Gas (Henry Hub) down 13.8% to US$6.47/MMbtu

Silver up 1.3% to US$18.48/oz

Platinum up 1.5% to US$1,579/oz

Palladium up 0.4% to US$428.25/oz

Copper (NY) down 0.7% to US$3.39/lb

Currency

A$ / US$ up 0.5USc to US$0.92 /A$

EUR / US$ up 0.0USc to US$1.44 /EUR

GBP / US$ up 0.0USc to US$1.60 /GBP

US$ / Yen up 0.3 Yen to 92.66 Yen/US$

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Dow up 31 pts to 10,605 (10,505 – 10,612)

S&P 500 up 5 pts to 1,142 (1,131 – 1,142)

Nasdaq down 2 pts to 2,299 (2,285 – 2,301)

Russell 2000 up 4 pts to 642 (633 – 642)

SPI 200 Futures up 29 pts to 4,913 (4,875 – 4,913)

FTSE down 3 pts to 5,527 (5,500 – 5,552)

Nikkei down 50 pts to 10,682 (10,637 – 10,774)

Shanghai SE Comp down 61 pts to 3,193 (3,177 – 3,269)

Top 3 US sectors: Financials up 2.3%; Industrials up 1.3%; Consumer Disc. up 0.9%.

Bottom 3 US sectors: Telecom Svcs down 0.9%; Utilities down 0.5%; Materials down 0.5%.

Rio Tinto plc up 0.11% to A$63.22 eq.; a 20% discount to prev Aust close A$79.00

BHP plc down -0.43% to A$36.34 eq.; a 17% discount to prev Aust close A$43.77

BHP ADR down -0.78% to A$43.76 eq.; a 0% discount to prev Aust close A$43.77

Gold: Barrick Gold Corp -1.3%; NewMont -0.4%; Anglogold -0.8%.

Oil: Chevron -0.4%; Exxon -0.3%; Coconophillips -0.5%; Anadarko -0.1%.

Resources: Alcoa -2.2%; Freeport -1.9%.

Steel: Arcelor +1.0%; Nucor -0.8%; US Steel +0.8%; Posco -1.3%.

Commodities

WTI Oil down 0.5% to US$82.75/bbl

Gold down 0.5% to US$1,131/oz

S&P 500 Metals & Mining Index down 2.1pts (1.1%) to 187.2

Sugar (NY) down 1.4% to USc28.00/lb

Corn up 0.8% to US$3.80/bushel

Wheat down 1.9% to US$5.18/bushel

Natural Gas (Henry Hub) up 16.0% to US$7.50/MMbtu

Silver up 0.4% to US$18.28/oz

Platinum up 0.0% to US$1,557/oz

Palladium down 0.5% to US$426.00/oz

Copper (NY) down 1.9% to US$3.41/lb

Currency

A$ / US$ up 0.5USc to US$0.92 /A$

EUR / US$ down 0.5USc to US$1.43 /EUR

GBP / US$ down 0.5USc to US$1.59 /GBP

US$ / Yen up 1.6 Yen to 93.31 Yen/US$

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Source: Bespoken Research

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Source: Bespoken Research

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Our research shows that in the four quarters coming out of a recession, the US has averaged GDP growth of 5.4%.  With a consensus estimate of +2.6%, economists are clearly expecting a weak recovery in the US.  However, does anyone remember a time when economists weren’t expecting a weak recovery?

Source: Bespoken Research

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Source: Bespoken Research

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Source: Bespoken Research

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The VIX has now been above 20 for 287 consecutive trading days, which is the longest streak since 1990 when our daily VIX data begins.  In the bottom chart, we provide a historical look at the VIX along with all of its streaks of daily closings above 20.  We’ve only seen two other periods where the VIX was above 20 for 200 straight trading days or more, and those ended at 239 days in June 1999, and 236 days in May 2003.  In terms of market performance following these long periods of high volatility, the S&P 500 was on the verge of making a mutli-year peak when the VIX broke below 20 in 1999, but it did very well in the months and years following the drop below 20 in May 2003.

Source: Bespoken Research

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The Australian market opened in the red and reached a floor for the day in the late morning, before recovering somewhat in the afternoon. The All Ordinaries finished Monday 41 points lower.

The S&P/ASX 200 closed 44 points down. The Consumer Staples sector was buoyed by gains in Woolworths (+$0.77). The Financials sector fell, with selling in Commonwealth Bank (-$0.77), Westpac (-$0.66), National Australia Bank (-$0.70), ANZ (-$0.83), Macquarie Group (-$0.96) and AMP (-$0.20). In the Industrials sector, Toll (+$0.18) gained while Macquarie Airports (-$0.08) and Asciano (-$0.04) went backward. The Materials sector dipped, hurt by BHP Billiton (-$0.12), Orica (-$0.52) and Fortescue (-$0.15); Newcrest (+$0.47) and Lihir (+$0.05) fared better. Other notable losers included Aristocrat (-$0.22) and Santos (-$0.37).

There was little company news on Monday. Oil Search entered a trading halt, regarding the termination of a proposed sale of an effective interest in PDL 2, including a ~3.5% interest in the PNG LNG Project to IPEC, as well as a share placement to institutional investors. Following completion of due diligence, Pacific Equity Partners has offered to acquire 100% of Energy Developments (+$0.10) for $2.65 cash per share. Meanwhile, Energy Developments has terminated discussions with the potential buyer of the UK and French landfill gas power generation assets.

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US stocks weakened on Tuesday after disappointing sales from Johnson & Johnson missed expectations.

Market breadth was negative. On the NYSE, losers beat winners four to three. On the NASDAQ, advancers topped decliners seven to five.

Financial shares were under pressure. Goldman Sachs fell 1.5% on an analyst downgrade. JPMorgan Chase, the Bank of America and Travelers Companies also declined. The Bank of America said it will waive attorney-client privilege and hand over legal documents related to its controversial merger with Merrill Lynch. The company has been under pressure from regulators for months to provide more information on the purchase.

Among notable movers in the financial sector was CIT Group, which tumbled 14% after the lender’s CEO said he would resign by the end of the year.

The NASDAQ stayed in positive territory after Cisco Systems agreed to buy Starent Networks Corp for US$2.9B. Cisco’s stock added 0.5%, whereas Starent, which makes telecommunications equipment, surged 16.8%.

Healthcare stocks slid after a key Senate committee endorsed a sweeping healthcare overhaul as it gained the support of an influential Republican. The proposal will be merged with the Senate health panel’s version and moved to the full Senate for debate in the next few weeks.

Johnson & Johnson posted weaker-than-expected quarterly revenue as sales of prescription drugs and cardiac stents disappointed. Third-quarter profit topped analyst forecasts, but that was largely because of cost cuts and lower taxes. Third-quarter revenue fell 5.3%. Earnings beat analyst estimates by 7cps, helped by lower research and marketing spending. Shares in Johnson & Johnson fell 2.4%.

Intel reported its results after close. Third-quarter net income dropped to 33cps. Analysts had expected income of 27cps. Revenue fell 8.1%, but was above expectations. Gross margin was 58% in the third quarter, compared with Intel’s initial prediction of about 53%. The company gave a better-than-expected outlook for the fourth quarter. For the fourth quarter, Intel predicted sales would be US$9.7B to $10.5B, compared with analyst estimates for US$9.5B. Intel was halted in extended trading.

Other major companies releasing results this week include JPMorgan Chase, Citigroup, Goldman Sachs, Google, Nokia and IBM.

Crude oil rose to a seven-week high in New York on speculation world energy use will grow as the economy rebounds and as a weaker dollar spurs commodity demand. The Organization of Petroleum Exporting Countries (OPEC) increased its 2010 global oil-consumption forecast on economic expansion in emerging economies. OPEC predicts that total crude consumption will increase by 700,000 barrels a day to 84.93M barrels a day next year, led by demand from emerging markets. This year, the group forecasts global demand will contract by 1.4M barrels a day to 84.24M barrels a day.

Gold futures rose in New York on concern a weakening dollar and rising inflation will enhance the appeal of precious metals.

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Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.

But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing – the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.

Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year – thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.

China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.

With global trade having restarted – although from a lower base – it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.

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The Australian market soared upon opening and reached a plateau for the rest of the morning, before lifting off again in the afternoon. The All Ordinaries finished Wednesday 99 points higher.

The S&P/ASX 200 closed 104 points up. The Materials sector surged, with winners including BHP Billiton (+$1.16), Rio Tinto (+$3.02), Newcrest Mining (+$2.22), Fortescue Metals (+$0.31), Lihir (+$0.17), Amcor (+$0.15), BlueScope Steel (+$0.08), Incitec Pivot (+$0.21), Alumina (+$0.09) and OZ Minerals (+$0.08). The Financials sector benefited from gains in the four majors: Commonwealth Bank (+$1.80), Westpac (+$0.33), National Australia Bank (+$0.93) and ANZ (+$0.55), plus a strong showing from Westfield (+$0.27), Macquarie Group (+$3.05), Suncorp-Metway (+$0.58) and Stockland (+$0.16). The Energy sector saw Origin (+$0.20), Santos (+$0.18), Oil Search (+$0.08) and particularly WorleyParsons (+$1.61) rise. In the Industrials sector, Leighton Holdings (+$1.27) and Macquarie Airports (+$0.16) gained but Brambles (-$0.41) extended its decline. Another notable loser was Singtel (-$0.14).

On Tuesday night, Rio Tinto took another step towards the development of a world class copper-gold resource in Mongolia with the signing of an investment agreement for the Oyu Tolgoi project with the Government of Mongolia. The government will address the conditions precedent and Rio Tinto and Ivanhoe Mines will commence the development phase. Production is expected to start in 2013.

US stocks rose for a third day as banks climbed on an analyst upgrade, while Alcoa jumped before beginning the third-quarter earnings season.

The S&P 500 fell for most of the day, as homebuilders declined on speculation Congress will not extend a tax credit. Pulte Homes, KB Home and DR Horton were down between 3% and 4%. AT&T led a slump in telephone shares after saying it will allow iPhone customers to use internet phone carriers.

Boeing, United Technologies, 3M and Travelers Companies were among the biggest decliners on the blue-chip average. They were also among the biggest gainers in the early-week rally.

Late in the session, a rally in a variety of financial stocks gave the market a boost. The Bank of America, the largest US lender by assets, and Wells Fargo each added 2.1%.

The benchmark index was further buoyed in the final hour of trading as investors speculated Alcoa, the first Dow company to report earnings, would post better-than-estimated results.

After market close, Alcoa reported its first quarterly profit in a year, as it benefited from improving metal prices and saved money by cutting jobs and reducing other costs. Profit, excluding one-time charges, was 4cps, exceeding analysts’ average estimate for a 9cps loss. Revenue was US$4.62B versus forecasts for US$4.55B. Results were weaker than those a year ago. Alcoa cut 18,000 jobs in the 12 months to June as the global recession depressed demand and prices for aluminium.

In other earnings news, Costco, the largest US warehouse club, reported fourth-quarter profit that fell less than analysts estimated as gross margin improved. Shares gained 1.8% in NASDAQ trading. Net income dropped 6% in the quarter from a year ago. Shoppers join the members-only warehouse club for basics, along with designer goods and other luxuries. Costco has seen sales of non-essential items fall as consumers pull back to cope with job losses and the recession. Costco runs stores in North America, Asia, Mexico, the UK and Australia.

Broad S&P 500 third-quarter earnings are expected to have fallen 25% from a year ago, extending the losing streak to nine quarters. Analysts expect the energy sector to report that profits fell 64% from a year ago. Industrials are expected to post a 45% drop in profits. Financials are expected to post the best results due to easy comparisons against an abysmal third quarter of 2008. The sector is expected to see earnings growth of 59%.

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Buoyed by an encouraging lead from overseas, the Australian market started strongly but soon began to shed its gains, and lost more steam after the RBA’s rate hike. The All Ordinaries finished Tuesday 18 points higher.

The S&P/ASX 200 also closed 18 points up. The Materials sector rose, with BHP Billiton (+$0.33), Rio Tinto (+$0.88) and Newcrest (+$0.76) climbing while Fortescue (-$0.19) fell. The Energy sector gained, with winners including Origin (+$0.28), Santos (+$0.13), Oil Search (+$0.10) and WorleyParsons (+$0.75); Woodside (-$0.43) bucked the trend and declined. The Financials sector saw gains in Westpac (+$0.51), ANZ (+$0.20), Westfield (+$0.24) and Macquarie Group (+$1.05); however, Commonwealth Bank (-$0.18) and National Australia Bank (-$0.11) dipped. The Industrials sector saw Brambles (-$0.20) fall while Leighton Holdings (+$0.83) and Macquarie Airports (+$0.08) rose. Losers in the Consumer Discretionary sector included Harvey Norman (-$0.11), Aristocrat (-$0.25), Fairfax (-$0.06) and David Jones (-$0.30). In the Healthcare sector, CSL (-$0.45) and ResMed (-$0.14) softened.

The Reserve Bank raised the cash rate by 0.25% to 3.25%. Graincorp (in trading halt) is to acquire global malt manufacturer United Malt Holdings for an enterprise value of $757M. The acquisition is to be funded by a 9-10 entitlement offer at $5.65ps and institutional placement raising a total of $589M, and a US$200M debt facility. Graincorp also upgraded its FY09 NPAT guidance to a range of $60M-$63M and said it will pay a dividend equivalent to 15cps per existing share. Brambles’ CEO will retire from his role on 1 November 2009. Brambles’ strategic review of its North American CHEP operations endorsed the continued use of wooden pallets and an improvement in customer service.

US Stock Markets

US stocks extended a worldwide rally, on speculation third-quarter earnings will top estimates and growing conviction the global economy is improving.

Market breadth was positive. On the NYSE, winners topped losers by almost four to one. On the NASDAQ, advancers topped decliners two to one.

The stock advance was broad-based, with 29 of 30 Dow stocks rising as investors piled into a variety of stocks battered in the recent sell-off. Investors welcomed reports that Australia became the first major economy to lift interest rates since the start of the financial crisis.

Producers of energy and raw materials had the two biggest advances in the S&P 500 among 10 industries, rising around 2%. Alcoa and Newmont Mining climbed at least 3.5%, while Exxon Mobil gained 1.6% as crude advanced.

The MSCI World Index of 23 developed countries added 1.9%, the most in two months.

In company news, Boeing said it will take a US$1B charge in the third quarter because of higher costs to produce its 747-8 airplanes and tough market conditions. The stock was little changed and was the only Dow stock to not advance.

Alcoa is scheduled to release third-quarter results on Wednesday, the first company in the Dow average to report earnings. General Electric and Intel are among the Dow and S&P 500 companies that will report in the next two weeks. Analysts expect companies will report a ninth straight quarter of declining profits before returning to growth in the final quarter.

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5. Stock Market Update 19-10-09

Dow Jones (US) 9,600 +112.1 +1.2

S&P 500 1,040 +15.3 +1.5

NASDAQ 2,068 +20.0 +1.0

US stocks rose as data showed service industries returned to growth after 11 months of contraction.

Banks led the advance, with the Bank of America, JPMorgan and Wells Fargo up between 4% and 7%. The KBW Banking index added 3.2%.

Department store chain Nordstrom climbed 9.5% for the biggest advance in the S&P 500 after analysts upgraded the stock. Limited Brands, the owner of Victoria’s Secret lingerie chain, climbed 7.6% after analysts raised their earnings forecasts for the company.

The US services sector expanded in September at a faster pace than expected, with the ISM’s services index coming in at 50.9, compared to a forecast of 50.0.

Alcoa is scheduled to release third-quarter results on 7 October, the first company in the Dow Jones index to report earnings. The company is expected to report a quarterly loss versus a year ago, reflecting a weak materials sector. Overall, S&P 500 profits for the third quarter are expected to have dropped almost 25% from a year-ago levels. Analysts expect companies to report earnings growth in the fourth quarter.

Among notable movers, Brocade Communications rallied 15% in unusually active trading on reports that it has put itself up for sale. Both Hewlett-Packard and Oracle were cited as potential buyers, according to media reports.

Since bottoming at a 12-year low on 9 March, the S&P 500 has gained 51.2% and the Dow has gained 45%. After hitting a six-year low, the NASDAQ has gained nearly 61%.

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5. Stock markets – keep an eye on confidence measures

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about two to one. On the NASDAQ, about nine stocks fell for every five that rose.

US employers cut a deeper-than-expected 263,000 jobs in September, lifting the unemployment rate to 9.8%, according to a government report on Friday. The Labour Department said the unemployment rate was the highest since June 1983. Payrolls have now dropped for 21 consecutive months. Friday’s report also showed companies cut working hours, pushing weekly earnings lower. The average work week shrank to 33 hours in September, matching a record low, while average weekly earnings fell to US$616.11.

Industrial companies in the S&P 500 fell 1.5%, the biggest decline among the index’s 10 industry groups. A report from the Commerce Department showed orders placed with US factories fell 0.8%, more than estimated, after a revised 1.4% increased in July. Excluding transportation equipment, orders rose 0.4%.

Energy stocks tracked crude prices lower. Chevron and Exxon Mobil both declined 1%.

More downbeat news came from General Electric (GE), which slid 3.8% after the CEO said the company was holding discussion on partnerships or an IPO for its NBC Universal unit (NBCU). According to media reports, GE and Comcast were discussing a deal under which the US cable firm would take control of 51% of NBCU with GE keeping the rest.

Apple shares were among the bright spots, rising 2.2% on an analyst upgrade.

The S&P index of consumer staples, up 0.6%, was the only positive S&P 500 sector. The sector was buoyed by a 4.2% gain in PepsiCo, which advanced after analysts upgraded the stock.

Alcoa, the biggest US aluminium producer, is scheduled to release third-quarter results on 7 October, the first company on the Dow average to do so. Analysts expect third quarter profits for companies in the S&P 500 to be down 23% from a year ago. For the fourth quarter, analysts expect profits to be up 63%.

Related posts:

1. Overnight Stock Markets 6-01-09
2. Stock markets – keep an eye on confidence measures
3. Stock markets: reversal time?
4. Stock markets – it’s all about confidence
5. Stock markets: Relief rally or new bull?

In the US, market cap has risen $4.88 trillion from its low of $8.09 trillion in March.  The peak in total US stock market value was $19.14 trillion in 2007, and the current value of all US stocks is $12.97 trillion.  The US accounts for 29.5% of total stock market value in the world.

Source: Bespoken Research

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3. Will Value Investors Win the Day? Wait Five Years and See.
4. Mini Forex Trading – For Small Scale Investors and Beginners
5. US Bear Market Losses: $11 Trillion Dollars

With the exception of a few Asian countries, most indices shown below are trading into overbought territory.  China’s Shanghai Composite is the only index trading below its 50-day moving average.  Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch.  After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there.  Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.

Source: Bespoken Research

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4. Commodity Snapshot
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1. Will leading indicators, as highlighted by our own GLI, continue to improve?

Will leading economic indicators continue to improve? We capture a wide variety of global data through our global leading indicator (GLI) and the GLI continues to show strong upward momentum. The GLI should lead the economy by a few months and we therefore are still optimistic about the coming months. As a result we have upgraded our economic forecasts for global GDP growth to 4% driven by improved (less bad) forecasts for the US, Europe and Japan.

2. Are the better signs in the US housing market likely to persist?

One of the sources of this crisis seems to have bottomed. The Case-Shiller house price index rose 0.75% in June, the 1st rise since May 2006.

3. What will tighter financial conditions in China do to growth?

Chinese policymakers have indicated they may want to slow the pace of lending and tighten financial conditions, but so far we see no evidence in the data for this.

4. Will Chinese import growth continue to accelerate relative to exports?

Import growth in China has been stronger than export growth. Popular wisdom holds that China only exports. It may be possible that China does have domestic demand and may play a role in the global economic recovery and the rebalancing of the world’s imbalances.

5. Is the recent positive surprise in Euro-area activity a one-off, or is it set to continue?

Europe, particularly Germany and France, surprised on the upside in the 2nd quarter. Looking at the breakdown of German GDP, we noted a 2nd quarter of positive personal consumption, something we believed Germans didn’t do. German forward looking surveys (e.g. PMI, IFO) continue to surprise on the upside, so the Q3 data should be an important item to monitor to see how the Eurozone as a whole will develop.

6. Will inflation continue to behave, despite improving growth and accommodative policies?

As we have argued many times, we don’t believe inflation to be a significant threat in the near term. There is too much spare capacity for inflation to really take hold. Monitoring inflation data should confirm this view.

7. When will policymakers withdraw the stimulus?

Investors are starting to get concerned about exit policies. We believe that policymakers will only start withdrawing stimulus measures once they perceive that their economies can sustain growth without their help. Only if we continue to see significant surprises on the upside, will they start earlier than we forecast now. This would however be a change of strategy for positive reasons. We believe also that the private sector will return at a certain point and that the world will be able to survive without government support.

The Goldman team concludes: “Based on our latest forecasts and recommended trading strategies, we expect equity markets and other risky assets to continue to perform generally well as we move into the final third of the year.”

Source: Goldman Sachs

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5. Economic rate of decline slowing down?

Who better to ask for more background on his thinking than the R man himself? The paragraphs below are excerpts from his latest newsletter.

“For four frustrating months or ever since the March lows, this writer [Russell] has been in a state of perplexity, better known as confusion. Now, at last the picture has clarified. I would like my subscribers to study the following explanation carefully. I’m going to explain why the trend of the stock market has turned clearly bullish under Dow Theory. The fooler was that this pattern did not occur immediately off the March lows – but it took place part-way up the rally and four months after the March lows.

“Please, refer to the charts of the Industrial and Transportation Averages below.

(1) The Industrials (top chart) recorded a low in May at 8230.

(2) The Transports also established a low in May at 2971.

(3) Next, both Averages rallied to June peaks, the Dow to 8877 and the Transports to 3434.

(4) Both Averages then turned down, with the Dow breaking support and declining to 8087. But important – note that the Transports held support and did not confirm the Dow weakness.

(5) After the Transport non-confirmation, both Averages rallied, and both Averages broke out above their June peaks.

“This was a classic Dow Theory bull market signal! To review – we saw the two Averages decline with one Average (Industrial) breaking to a new low while the other Average (Transports) refused to confirm. Next, we witnessed a rally with both Averages breaking out to new highs.

“Note – Both Averages are now overbought, based on the level of the RSI.”

Source: StockCharts.com

“The trend of the stock market is now bullish. But this is where interpretation is critical.

“Nowhere during 2008 or 2009 did we see anything typical or characteristic of a major bear market bottom. However, recently we witnessed a Dow Theory bull market signal. My interpretation? We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.

“There is no way of knowing how high this bear market rally might carry. The question – is it worth playing this cyclical bull market? My answer is yes, but play it very conservatively and carefully.”

And that is the word according to a long-timer that has spent more than half a century following the ticks on the tape.

As an aside, I have been subscribing to the Dow Theory Letters for more than 26 years and highly recommend them for the stimulative nature of the content.

Source: Investment Postcard

Related posts:

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2. Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?
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4. Identifying a bear market bottom – Richard Russell (Dow Theory Letters)
5. Richard Russell (Dow Theory Letters): Characteristics of secondary reactions

Underwriters: Credit Suisse (australia) Limited, J.P. Morgan Australia Limited, Macquarie Capital Advisers Limited, RBS Equity Capital Markets (Australia) Limited, Deutsche Bank Ag - Sydney Branch, Morgan Stanley Australia Securities Limited, and Societe Generale.

Note: Rio Tinto Limited has obtained a waiver from the ASX allowing the timetable for the Rio Tinto rights issue to be shorter than that ordinarily required under the ASX listing rules.

The date for second posting of Rio Tinto Limited entitlement and acceptance forms to qualifying Rio Tinto Limited Shareholders (i.e. Rights Despatch Date) is 26 June 2009.

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Early warnings of the loss of momentum can be traced back to early May when the S&P 500 broke below two faster-accelerating trend lines and then subsequently failed to climb back above them. To keep things in context, Monday’s action looks like a small blip so far, but we have to be aware that the S&P 500 has now failed on numerous attempts to get back above 950 and is now testing a less accelerated trend line while its RSI momentum diverges from price. Any movement below that aforementioned trend-line level would suggest the market may want to test the next level of support near 875.

At this point the low-hanging fruit has been picked and easy money has been made and traders/investors need to be more selective while the market corrects the excesses of the run off the lows. It doesn’t mean money can’t be made on the long side or we that we have to have a full retest; it just means being patient, and buying the next corrective wave may make more sense than chasing. To get a renewed bullish outlook, 950 will need to be taken out on a solid upside breadth day (i.e. good ratios for advance/decline and up/down volume).

Source: Kevin Lane

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The table shown below allows you to visualize the transition that has taken place between March and June of 2009. In March (far left side of the table), most markets had the characteristics of a bear market. Currently (right side of table), numerous markets look much more like an early bull market than an on-going bear market. Below, we will use the S&P 500 (2000-2004) to illustrate and expand on the concepts as they relate to the current day and the information presented in the table below.

Printed Money And ‘Less Bad’ Economic News

In 2009, the basic rationale for driving stock prices higher leans heavily on the “less bad” perception of future economic activity. The markets, as evidenced by credit spreads, commodity prices, and stock prices, have been able to move away from “the end of the world as we know it” mode. An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by inflation. The market’s perception seems to be “if things get worse economically, and they may, the policymakers’ response will be more stimulus and more printed money”. This perception coupled with the “less bad” outlook has increased the demand for inflation-friendly and weak-dollar assets (oil, gasoline, copper, emerging market stocks, foreign bonds, commodity-related currencies, etc.).

By studying past bull and bear market cycles, we can better understand what to look for during a possible transition form a bear market, dominated by fear, to a bull market which eventually becomes dominated by greed. If we are not aware of the twin thieves, greed and fear, they will rob us and hamper our ability to grow our accounts. As we have stated in the past, in a bull market:

• Price tends to stay above the 200-day moving average(MA) (red line).
• The 50-day moving average (blue line) tends to stay above the 200-day moving average.

In bear markets, professionals tend to buy at extreme points of pessimism looking for a profitable trade. Traders often ride a market back to its 50-day or 200-day moving average and then take profits. In a bear market, traders tend to sell at the 50-day or 200-day because their fear of losses remains greater than their confidence the market can move higher. Their lack of confidence speaks to their pessimistic view of future economic activity. Bear market rallies are mainly fueled by traders and lack participation from longer-term investors.

In a bear market (see above), where conviction is lacking to push prices higher:

• Price (black line) tends to stay below the 200-day moving average.
• The 50-day moving average tends to stay below the 200-day moving average.

At some point in a bear market, the perception of traders and investors slowly starts to shift toward the acceptance of better times ahead (or “less bad” times). When their confidence, and more importantly their conviction, becomes strong enough, instead of selling at the 50-day or 200-day moving average during a rally, they hold thinking the markets may be able to move higher. If enough investors and traders share the same improved outlook, a market is finally able to clear previously insurmountable hurdles in the form of the 50-day or 200-day moving average.

Emerging Markets Have Lead The Way Higher

Since the S&P 500 is a laggard in the current market, we will use the Emerging Markets Index to illustrate how numerous leading markets, asset classes, and sectors look in June of 2009. If you compare the chart of the Emerging Markets Index below to the This is What A Transition From A Bear To Bull Looks Like chart above, and do it with an open mind, you will be hard-pressed to come away with a bearish interpretation.

Leading Markets Are Holding Above Their 200-Day MAs

When buyers have enough conviction to push a market above its 200-day moving average during a bear market, they are often immediately greeted by heavy selling. The crossing of a 200-day moving average means little if the market cannot successfully retest and hold it. The longer a market stays above the 200-day MA the more meaningful and bullish it becomes.

Part Of The Pattern: Not Accepting The Possibility Of A New Bull

The fact few are willing to call the current rally anything more than a bear market rally fits well with the historical profile of new bull markets. No one, can definitively say a new bull market has or has not started – only time and future market action will tell. However, we can confidently state that what has transpired since the March 2009 lows compares very favorably with the end of a bear market and the beginning of a new bull market. How long a new bull might last is also something that can only be definitively answered in retrospect. While market conditions have improved, risk management must remain a significant part of any investor’s game plan. Even bull markets can experience significant corrections.

Check Your Forecast At The Door

Our job is not to agree or disagree with the market’s collective bullish stance. The market does not care what we think and is going to do what it is going to do regardless of any bullish or bearish analysis we can produce. The same can be said for any individual, investment firm, or talking head on TV – the market does not care what they “think”. Our job is to discern as best we can the prevailing risk-reward profile of any given market. The evidence at hand strongly supports a shift from unfavorable conditions for investing to favorable conditions for investing. The purpose is not to forecast, but to understand what is in front of us at the present time while understanding the current bullish evidence may not be in place in a few weeks or months. It is important that we keep an open mind about both bullish and bearish outcomes in order to process future signals from the market with an unbiased mind. This is one reason why we look to minimize bullish and bearish debates with clients – we are human beings and we can become biased just like the next guy. If the markets continue to go up, we want to participate. If the current bullish signals are discounted with obviously bearish action, we will shift our strategy accordingly.

Forecasting Can Lead To Defending

As we have stated for years, forecasting can lead to biased interpretations of future market activity. If we tell you this is a bear market rally, we will look for reasons to remain bearish from both a fundamental and technical perspective. Rather than producing and possibly needing to defend a forecast, we simply need to pay attention to what has and is actually happening. If you approach the current market with an open mind, and with a sense of history, it is nearly impossible to ignore the almost countless reasons to accept the possibility a new bull market has started – one that could last longer and go further than most can even imagine. Knowing what we know, it is prudent to continue to deploy capital as long as conditions remain favorable. It is also necessary to respect the numerous fundamental problems that remain and to understand the market’s bullish stance may be relatively short-lived.

Fundamentals Are Built Into The Charts

Charts are a way of monitoring the current risk tolerance and collective economic outlook for all market participants. Every bit of fundamental analysis and its impact on investor behavior is built into the charts. Fundamental analysis from the largest brokerage houses and the most successful hedge funds is reflected in the charts. The charts are clearly stating that the collective fundamental outlook has improved greatly in the last 90 days. If the collective economic outlook was not greatly improved relative to prior expectations, numerous asset classes would not have received the conviction from buyers necessary to overtake their 50 and 200-day moving averages. What has happened since the March 2009 lows is most likely not a purely technical event. A purely technical event or a bear market rally from oversold conditions most likely would have failed long ago. If we are willing to listen, the markets are trying to tell us the next 12 to 18 months may not be as bad economically as many believe. The longer the markets can hold above their 200-day moving averages, the more significant the technical and fundamental signals become.

Source: Chris Ciovacco

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3. Birth of a New Cyclical Bull?
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5. What MUST Happen Before a New Bull Market Starts?

Source: Bespoken Research

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4. Sustainable Bull Market Not Likely
5. Richard Russell (Dow Theory Letters): Lowry’s statistics do not favor a new bull market

More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index.

Source: Plexus Asset Management

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Source: Bespoken Research

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China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

“The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities,” said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front – gold, oil, copper, soybeans -  managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market – you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Source:Prieur du Plessis

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The surprisingly dovish accompanying Statement was of interest however. The RBA remains focused on underlying economic weakness and ongoing financial fragility. China was seen as an economy displaying the ‘clearest’ signs of recovery.

But most surprising was the explicit recognition that the RBA can cut further:
“…the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.”

This seems a little at odds with the better flow of economic information recently and improvements in global equity and commodity markets. Our guess is that the RBA is try to calm some recent trends in local markets, in particular rising term interest rates and the winding back of easing expectations, but probably more importantly the strong rise in the Australian dollar on both a $US basis as well as on a TWI basis (up 22% since the beginning of February).

While this is just a guess, the sentiment that rates can be cut further is consistent with our view that the Australian economy is likely to experience an extended period of weak economic growth and that we are yet to see the fall-out from rising unemployment (and falling employment). While the rapid policy stimulus of 2008-09 appears to be working well (tomorrow’s GDP is expected to rise by around 0.4%) it cannot be assured to continue to support growth through the back half of the year.

We expect the RBA is likely to be on hold for at least the next few months. We have the next cut in August but are ambivalent about the timing given the inherent difficulties in forecasting trends in employment and domestic demand at present. We are happy with the view that the RBA cash rate is likely to trough at somewhere between 2% and 2.5% in this cycle.

Source: ANZ Global Markets

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Source: Bespoken Research

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Richard Russell (Dow Theory Letters) said: “The US Dollar Index is sitting on what I term ‘the edge of the cliff’. If the dollar falls apart, we’re dealing with a whole new story – it will affect almost all investments, US and foreign. The sliding dollar is already putting pressure on Treasury bonds, particularly the long-term maturities. This is causing our creditors (think China) to cut back.” The graph below shows that the sovereign debt bubble may be in the midst of bursting.

The higher Treasury yields had a negative impact on mortgage rates, with the 30-year fixed rate increasing by 29 basis points to 5.27% on the week and the 15-year fixed rate by 25 basis points to 4.87%, as indicated by Bankrate.com. Yields on mortgage bonds for the first time exceeded the levels at which they were trading before the Fed’s announcement of expanding Treasury purchases to reduce lending rates. This raises the question of whether the Fed might soon increase its Treasury buy-backs.

 Source: Investment Post Card

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The Energy sector has the highest percentage of stocks above their 50-days at 97%.  The next best sector is Materials at 86%, followed by Health Care at 85%.  Telecom (56%) and Consumer Discretionary (59%) currently have the weakest breadth readings.

Source: Bespoken Research

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The agreement is as follows:

Iron ore fines – US¢97/dmtu down 33% from US¢145/dmtu

Iron ore lump  US¢112/dmtu down 44% from US¢202/dmtu

(dmtu – dry metric tonne unit)

We had assumed price reductions of 35% for fines and 40% for lump, hence the contract prices are roughly in line with what we had expected. We believe the result is ahead of consensus expectations which ranged from 30-50% reductions for both fines and lump. The removal of the contract pricing uncertainty should also be a positive for most of the iron ore companies.

The biggest leverage to the news (aside from BHP and RIO) is FMG and MGX, the largest of the independent iron ore producers. AGO and MMX should also benefit from the removal of the uncertainty surrounding prices. Our preferred pick is FMG.

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“Oil prices reached $62/bbl last week, despite lofty US oil inventories (notwithstanding this week’s inventory decline) and the fact that Americans are driving much less than last year. The higher price of oil reflects in part the upturn in Chinese oil imports and car sales at a time when oil production is lagging. Russia continues to have difficulty boosting output and oil production has been flat for most OPEC countries. Saudi Arabia has cut production sharply.

“As with other commodities, oil should benefit from both a weaker US dollar and a shift in investor portfolio preference toward real assets as a hedge against inflation. The upturn in our global leading economic indicators is another positive sign for the commodity complex. Bottom line: Our strategists have upgraded commodities to overweight recently, with energy at the top of the buy list. Investors should consider playing the oil bull market by buying North American exploration and production stocks, or by going long the Norwegian krone and the Canadian dollar.”

Source: BCA Research

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“‘For the purpose of this discussion, a secondary reaction is considered to be an important advance in a bear market, usually lasting three weeks to as many months, during which interval the price movement generally retraces from 33% to 66% of the primary price change since the last preceding secondary reaction.

“‘Those who try to place exact limits on secondary reactions are doomed to failure, just as surely as would be the weather man who forecasted a snowfall of exactly three and one half inches within a specified time.

“‘In a bear market steady liquidation of securities by those who prefer or need cash reduces quotations day after day, with professionals, realizing there is more room on the bottom than on the top, hastening the decline with short sales. Eventually, the market is forced to a lower level than is warranted by conditions. The short interest is perhaps too extended, with wise traders sensing the fact the liquidation has, for the time, at least, run its course.

“‘Quiet, weak spots in bear markets are generally good ones to short, as they generally develop into serious declines.

“‘In a primary bear market the rallies are apt to be violent and erratic, and always occupy less time than the decline, which they partially recovery. Often the primary movement of several weeks is retracted in a few days.

“‘Rallies in a bear market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.

“‘In bear markets, primary movement has an average duration of 95.6 days, whereas the secondary movement averages 66.5 days or 69.6% of the time consumed in the preceding primary movements.’

“All the above pertains to the price action during rallies in bear markets. But what about business conditions during bear market rallies? My studies show that bear market rallies are technical phenomenons which do not necessarily reflect on business. I’m looking at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Federal Reserve Index turned down in late-1929, and despite the great bear market rally, the Fed Index continued lower into early 1932.”

Source: Richard Russell,

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2. What are the markets trying to do? – Richard Russell (Dow Theory Letters)
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4. Identifying a bear market bottom – Richard Russell (Dow Theory Letters)
5. Is this a true bear market bottom? – Richard Russell (Dow Theory Letters)

“Climactic capitulation – Bear markets usually end in climactic fashion, which is the phase of greatest capitulation and despondency. This is what happened late last October and also in November.

“Base building – The most persistent capitulation stage marks the beginning of the end for the bear market, which by definition, must also be the beginning of the new bull market, although all one may see for some months will be ranging, including some new lows by indices for less fundamentally attractive markets, but also rising lows by indices for the next bull market’s leaders.

“Reversion to the mean – If the bear really is ending or over, you will see the evidence accumulate in several ways, which are different from the redistribution bear market rallies which occur on the way down. Mean reversion (we use the 200-day moving average to measure this because it is a widely followed medium to somewhat longer-term trend smoothing device) will become evident due to a combination of different developments.

“Uptrends are established – Indices will be breaking up out of their ranging bases, with the best performers establishing step sequence uptrends, one above the other. These will eventually break above the 200-day MAs, which will eventually turn upwards sometime later. The rising MA becomes a potential support level during minor mean reversions throughout the duration of the new uptrend.

“Summary – Perspective is gained by monitoring many indices, as there will inevitably be leaders and laggards. This is Fullermoney’s commonality approach. For instance, if stock market indices are mostly ranging but downward breaks are no longer being maintained, in contrast to some rallies which are being extended, one does not need to be a genius to deduce that demand (buying pressure) is beginning to exceed supply (selling pressure).

“The performance of upside leaders when looking for evidence of market bottoms and recovery potential is much more important than focussing on laggards, because we are looking for a transition from bear, which includes all stock market indices in its latter stages, to bull in which case markets will break away from the prior downtrend one by one over time.”

Source: David Fuller

Related posts:

1. David Fuller (Fullermoney): Global stock markets leaders – what are they saying?
2. David Fuller (Fullermoney): Will stock markets stay above March lows
3. Richard Russell (Dow Theory Letters): Are equities offering value?
4. Emerging-market equities show leadership
5. Measured Move – Bullish (Continuation)

ASIC is due to review the status of its ban on covered short-selling of financial stocks. The ban is currently in place until Sunday, 31 May 2009.

Impact

Less scope for an absolute short. The outlook for Australian banks has improved considerably over the past few months. first half 2009 results showed improving levels of capital, coverage and funding. As visibility continues to improve, the majors will be able to demonstrate that impairment risks are manageable, and unlikely to result in capital erosion.

In the eyes of the short-seller. In considering a potential short-position in Australian banks we expect most investors to place less emphasis on the standalone story (which is good), and more emphasis on the relative arguments. On this basis, Australian banks are likely to find themselves on the short-side of most trades.

Relative fundamentals. Australia is on the cusp on an economic downturn. Credit growth is slowing; impairment costs are rising; capital ratios may decline; and all against a backdrop of rising unemployment and contracting GDP. Conversely the US, UK and European economies have already suffered several quarters of weak operating conditions, suggesting the scope for recovery in offshore markets may be better than in Australia.

Relative valuations. Australian banks look expensive relative to regional and global peers. On the one hand, we’d argue this is justified given higher levels of near-term and sustainable returns (ROE). On the other, higher relative valuations suggest the scope for share price recovery may be less than international peers.

Outlook

The reintroduction of short-selling will, by definition, increase selling activity in Australian banks. Our analysis of the global sector suggests global investors are likely to view Australian banks as expensive, with a less attractive recovery story.

We find very little cause for an outright assault on share prices. However, in our view the relative story for the major banks and their large market capitalisation (~9% of the Top 30 banks market cap) mean Australian banks are a viable funding source for pair-trades within the global sector.

Our sector preference remains WBC, ANZ, CBA, and NAB. We highlight potential pair-trades within the domestic sector in this report.

Source: Macquarie Private Wealth

Related posts:

1. ASIC Lifts Ban On Covered Short Selling Of Financial Stocks
2. Central Banks are Buying Gold for their Reserves Now!
3. Short Sales Rise to Most Since September – NYSE Says
4. Think That Central Banks Move the Markets? Think Again
5. Short-Covering Driving Today’s Gains

Related posts:

1. ASX Market Movers – 13 May 2009
2. ASX Market Movers – 19 May 2009
3. ASX Market Movers – 11 May 2009
4. ASX Market Movers – 20 May 2009
5. ASX Market Movers – 12 May 2009

Alternative scenario: only the upside breakout of 10.3 will invalidate our bearish scenario. In this case, a recovery should shape towards 10.53.

Disclaimer

Related posts:

1. CFD Intraday Trade Idea – Macquarie Group (MQG)
2. CFD Intraday Trade Idea – ANZ Banking Group (ANZ)
3. CFD Intraday Trade Idea – Transurban Group (TCL)
4. CFD Intraday Trade Idea – Commonwealth Bank Of Australia (CBA)
5. CFD Intraday Trade Idea – Origin Energy (ORG)

Related posts:

1. ASX Market Movers – 19 May 2009
2. ASX Market Movers – 21 May 2009
3. ASX Market Movers – 13 May 2009
4. ASX Market Movers – 11 May 2009
5. ASX Market Movers – 12 May 2009