Tuesday, June 9, 2009

Weekly Stockmarket Report

As reported by Associated Press:

European stock markets were little changed Tuesday following modest losses in Asia as investors awaited signals about whether the rally of the last three months will continue through the summer.

"Wall Street stumbled ahead of the close after a strong rally and with limited directional data around, how the U.S. performs later today could be instrumental in determining where the European markets close too," said Matt Buckland, a dealer at CMC Markets.

Stock markets have rallied strongly over the last three months largely on better than expected economic data, particularly out of the U.S. As stocks usually start rising 6 to 9 months before actual recovery emerges in the official economic data, investors have bet that the massive sell-off in markets during the most acute phase of the financial crisis was overdone.

Despite the improvement in the economic data, concerns linger about the global economy. With interest rates on government bonds edging higher, unemployment continuing to rise and oil prices back near six month highs, investors are concerned about the sustainability of a potential recovery.

As a result, there are worries in the market that if economic data around the world starts to disappoint expectations, then investors may have to start revising down their recent optimistic tendencies. Some of the world's major equity indexes are now in positive territory for 2009.

And though the financial system may have been saved from collapse, investors still want more evidence that banks are once again lending to businesses and households. So far, there's very little to show that the lenders are doing anything other than improving their balance sheets.

Investors will also be watching announcements in the U.S. about which of the country's biggest banks will be able to repay billions in federal bailout dollars. The government may issue that list as early as Tuesday.

"It appears that there may be as many as ten banks fit enough by stress test criteria that may shortly repay their loans," said David Buik, markets analyst at BGC Partners.

Please take a look at the chart of the CBOE Volatility Index or VIX below:

VIX is like a fear gauge and reflects investors' level of fear. VIX reached a historical high in October 2008 and since then has come down a lot. So VIX and the overall stockmarket moves in opposite direction to each other i.e. when VIX rises, investor fear increases and stockmarket moves down and vice versa.

As the rally that has lasted the past three months show, VIX has come down to reflect investor optimism towards the U.S. and global economy. Investors seem to be quite optimistic and is expecting some form of recovery by the yearend.

From the chart above, VIX is still below both its 20 and 40 day moving averages which is bearish for VIX.

However, the MACD for VIX although still negative, has stayed above its signal and seems to be indicating a move upwards. This is bullish for VIX.

The Slow Stochastic is at 52.95 which is neutral for VIX and is above its signal.

So depending on investor sentiment in regards to whether investors think a sustained rally is feasible, there are both bearish and bullish indications for VIX which means that VIX could either go up or down in the following weeks depending on whether investors will continue to support a stockmarket rally.

Take a look at the chart for S&P 500 Index below:

The S&P 500 Index has remained above both its 20 and 40 day moving averages which is bullish for the index. Most crucially, the S&P 500 Index has finally closed above its 200 day moving average, which is extremely bullish for the Index as most traders would see this as a bullish signal to buy stocks. Time will tell whether this rally is actually the "bottom" for the market or whether it will retest previous lows. It all really comes down to investor perception on what sort of economic recovery they are expecting.

Looking at the chart above, the MACD has stayed positive which is bullish for the index, and it has stayed above its signal, another bullish sign for the index.

The Slow Stochastic is at 69.56 which is close to its high threshold of 80. But if sentiment remains bullish, the Slow Stochastic still has room to move upwards.

So from the chart for S&P 500, investor sentiment still seems to be quite bullish. The crucial sign is that the index has finally moved above its 200 day moving average which is an extremely bullish signal for traders. As long as sentiment remains bullish about the economic recovery, this rally could well be the start of a bull market in stocks. Only time will tell.

This is this week's economic calender:

Jun 9 10:00 AM Wholesale Inventories Apr
Jun 10 8:30 AM Trade Balance Apr
Jun 10 10:30 AM Crude Inventories 06/05
Jun 10 10:35 AM Crude Inventories 06/05
Jun 10 2:00 PM Treasury Budget May
Jun 10 2:00 PM Fed's Beige Book
Jun 11 8:30 AM Retail Sales May
Jun 11 8:30 AM Retail Sales ex-auto May
Jun 11 8:30 AM Initial Claims 06/06
Jun 11 10:00 AM Business Inventories Apr
Jun 12 8:30 AM Export Prices ex-ag. May
Jun 12 8:30 AM Import Prices ex-oil May
Jun 12 9:55 AM Mich Sentiment-Prel


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To appreciate beauty; to find the best in others; to leave the world a bit better whether by a healthy child, a garden patch or a redeemed social condition; to know even one life has breathed easier because you have lived. This is to have succeeded.

Ralph Waldo Emerson