Exciting markets!
Comment of the Day

October 20 2013

Commentary by David Fuller

Exciting markets!

David Fuller's view The strong rally for leading stock markets started almost a year ago, from an oversold condition and background of bearish sentiment. As share prices continued to rise, valuations also increased before equity indices spilled over in a nervous, choppy corrective phase in May.

The economic background has included a soft global economy, not surprisingly, following the credit crisis recession in 2008. Economists with a good historical perspective of these severe events, which are fortunately rare relative to most cyclical recessions, have pointed out that it takes at least five to seven years before economies return to average growth patterns. We are a little over four years into the recovery process on Wall Street and considerably less so for most of Europe.

Consequently, I continue to disagree with those who say that we should not have had quantitative easing (QE), or that we should be ending it more quickly. During a credit crisis recession and long after its nadir, central banks need to pump in liquidity aggressively and persistently because consumers and corporations are deleveraging, while also reducing spending and increasing savings where possible. If central banks did nothing during that process, or ended their stimulus too soon, the global economic crisis would have been considerably worse.

Fed Chairman Ben Bernanke, whose career is based on his study of the US Depression during the 1930s, responded with the most stimulative monetary policy ever seen in the USA. Surely this has helped to prevent a double dip recession, while also contributing to the USA's modest economic recovery, rather than a deflationary slump feared or predicted by many. ECB President Mario Draghi followed a similar path after his appointment in November 2011, and deserves credit for the improvement we see today, especially against the background of so many dire forecasts for Europe. Similarly, Prime Minister Shinzo Abe's campaign to stimulate Japan out of its lengthy disinflationary / deflationary morass appears on course since his landslide election victory in July, to the surprise of many non-Japanese commentators who forecast disaster.

The full results of these monetary experiments will not be known for at least another five to ten years but equity investors have cause for some satisfaction, judging from the Global Dow 150 Index. Meanwhile, the USA's political farce has not helped its modest economic recovery. Nevertheless, the inevitable further postponement of QE tapering has enabled Wall Street to extend its consistent uptrend, which is becoming temporarily overbought once again (S&P weekly & daily). This is most clearly seen on the leading Nasdaq (weekly & daily) and Russell 2000 (weekly & daily). Watch for either a clear downward dynamic or loss of upside momentum as evidence that another reaction and consolidation is commencing. However, I would still give the upside the benefit of doubt through yearend, provided the sequence of higher reaction lows is not broken.

I will have time for more comment and analysis, starting on Monday.

Quote of the week - On detachment from the crowd:

"A great IQ is not needed to do well as an investor, what is needed is the ability to detach yourself from the crowd."
Warren Buffett

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