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It's not difficult to be bearish if you look around and read the news. Yet, the market's performance on Wednesday was not all as bad as the Dow Jones Industrial average looked.
The S & P 500 (SPX, below) didn't break above 850, but didn't fall apart either. In fact this show of some relative strength makes you wonder if the stock market isn't starting to factor in some sort of recovery.
Chart Courtesy of StockCharts.com
The reason we're bringing this up is because the expectations for the European economy are dismal, along with news from Japan and Russia that have been released in the last few days. Yet, the charts are saying something different.
According to The Wall Street Journal: "The EU's economy is set to contract 4% this year, even worse than the 2.8% drop projected for the U.S., according to new forecasts published Wednesday by the International Monetary Fund." More interesting is the fact that despite this dire prediction, Europe's leading economy, Germany is facing the prospect of no further economic stimulus from the government.
Merkel told reporters that instead of talking about a third stimulus package, she would prefer to "let current measures take effect." Meanwhile in the U.K., the top tax rate was raised to 50%, in the midst of a significantly severe economic downturn for the island nation. The new tax rate will be levied on those who earn more than $150,000 pounds ($217.500).
To be sure, Ms. Merkel may change her mind, as elections in Germany are scheduled for September of this year. Her position was further boosted by a better than expected reading in a key purchasing manager's report released early this morning. According to Bloomberg: "A composite index of Euro-region services and manufacturing industries was at 40.5 in April, from 38.3 the previous month, according to Markit Economics, which surveys purchasing managers."
Merkel's own party is not sounding very optimistic. According to The Journal: "German Finance Minister Peer Steinbrück on Wednesday said it was "not unlikely" that the country's economy will shrink by 5% or more this year, and leading German economics institutes said GDP is set to contract 6%, which would be its worst recorded performance since 1931."
Chart Courtesy of StockCharts.com
Yet, German stocks, as featured in the Ishares Germany ETF (NYSE: EWG) seem to have bottomed, and are charting a similar pattern to the S & P 500. And the better than expected manufacturing report was keeping the bears out of the kitchen on 4-23.
Markets are forward looking, and are boosted by persistent pessimism, lower interest rates, and money that is willing to take risks.
Stocks face competition from bond, currency, and commodity markets. If you look at bond yields, they are so low that few are willing to buy them at this time. Currency markets are too volatile and trendless for most traders. And commodities are still reeling from the contracting economy.
Yet, the system is flooded with money. And this money is under pressure to deliver investment returns, with stocks being the beneficiary, given the fact that the stock market is being quite resilient at this time.
Conclusion
The news is bad. And the market is increasingly volatile. But, unless the S & P 500 falls apart altogether, you've got to be betting that the bottom is finally in.
That means that you now have to consider two scenarios as being plausible. One is that stocks move sideways. The other is that they move higher. Obviously, we could be wrong and the market could fall. But, for now, this seems the least likely scenario.
If you read this space yesterday, you know that we were looking for a break in the market. But the fact that no such break happened, except in the Dow Industrials, has made us change our view slightly.
Are we totally bullish? No. Are we totally bearish? No. So where are we? We are looking at the charts and trying to make sense of this market.
What that means is that we'll be trading. And today, it looks as if the market wants to go higher. Tomorrow, that might be different. Do we like day trading? No. Are we trying to day trade this market? No.
What's the bottom line? If we find good looking stocks to go long with, we will. If we find something that is worth shorting, we'll do that too.
More than anything, though, we expect this to be a blue collar, roll up your sleeve, two yards and a cloud of dust scenario. Visit all our sections for the latest recommendations.
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