Is There Still Life In The Equity Bounce?

Glasses were definitely half-full last week as all news was good news. Equities finished the month on a high, confining the safe-haven trades to the waste bin.

As quarter-end re-balancing goes, last week was pretty impressive. A healthy appetite for risk was the central theme, sending equities skywards and the Dollar, Yen and gold tumbling.

So, with the start of a new quarter let’s have a look at what re-ignited the bulls and whether the moves are sustainable. Today I’ll be looking at equities, then later in the week I’ll turn my attention to gold and the forex market.

Markets

Regardless of one’s view of the real world, March was a good month for the bears to hibernate. From March 6th to April 6th the Dow (^DJI) rose by 25%; the Dax was close behind at +23% and the FTSE (^FTSE) rose by a highly commendable 18%. But whilst a rally into the quarter-end had been expected, the push for higher ground happened last week, carrying on into April.

A 30-Second Guide To Last Week

Manufacturing PMIs on both sides of the Atlantic (and in China) showed signs of improvement. Likewise, some housing data in the UK and US were not as bad as feared, including an astonishing rise in the Nationwide House Price Index.

In politics the G20 provided an April Fool’s agreement on a $1 trillion package of solutions to the world’s problems. Head of the Fed Beardy Ben Bernanke promised that the central bank would pull out all the stops to stabilize the banks, and the FASB went one better and provided a smokescreen for US banks by suspending the Mark to Market accounting rule.

The ECB cut rates by a begrudging 0.25% but hinted at a more interesting announcement next time. Oh, and jobs numbers were terrible, but not so out of line as to spoil the party.

What’s Coming Up?

Japan is promising another fiscal stimulus, thought to be an additional Y10 trillion on Good Friday. Thursday’s Bank of England meeting isn’t likely to keep too many traders at their desks; the UK central bank is expected to pause for breath after a busy few months.

There’ll be some interest in Wednesday’s FOMC minutes to see what persuaded them to introduce the Quantitative Easing measures. Otherwise, the economic data is mainly second division, good background stuff with a smattering of manufacturing and trade numbers.

But the real nitty-gritty for equity markets will be the latest installment of US earnings. This kicks off today with numbers from Alcoa, and will pick up pace over the next three weeks.

The Technicals Are Sound

There’s a consistent theme running across the main index charts. The charts are supportive of the bull run with daily RSIs above 50 and rising, and the indexes above their (rising) 21-day and 50-day moving averages.

However, with the exception of the broader-based S&P 500 (^GSPC), the indexes have all failed at their 100-day moving averages.

See how the FTSE index has been holding the upper Bollinger range since it crossed over in mid-March. Note also how the price bounced off its 50-day moving average on Monday, though it’s currently testing the level again this morning.

But it has failed twice before at the 100-day MAV this year, increasing the street cred’ of the resistance at that line.

The Dax also found recent support at its 21-day and 50-day moving averages and looks keen to have another pop at the 100-day MAV. It hasn’t seen the 100-day MAV since a failed attempt last August.

The Dow does register a trend reading on the ADX measure, and having found solid support at the 50-day MAV is gnawing away at the 100-day MAV. The broader S&P is one step ahead of the pack, finding support, rather than resistance, at its 100-day MAV. With a good trailing wind the S&P could test February’s high of 875, and possibly January’s 950.

How Am I Trading This?

March was a minor triumph for me in that I didn’t get caught badly short (that’s what tends to happen to me after a big sell-off). Recently I’ve been trading both ways, but in smaller bet sizes.

I’m still long-term bearish of equities; I don’t know if they’ll reach a new low, but I just can’t see the economic woes being over yet. The nature of a bear market rally has to be that enough traders believe the market to have turned; that’s why the ensuing sell-off can get so nasty. However, painful experience has taught me to stick those views in a ‘pending’ file and trade what I see for the time being.

The key points for me in the near term are:

1. I may be wrong, but I just don’t think the effects of rising unemployment have anyway near played out yet. I shouldn’t trade off this though as it’s only a hunch.
2. The suspension of marking to market gives the banks breathing space in the short term, but doesn’t solve their balance sheet problems, and the opacity might deter investors. This morning a report suggested that the IMF would warn that global toxic debts could yet spiral to $4 trillion.
3. On the subject of opacity, the G20 love-in had all the hallmarks of a Gordon Brown budget. As the smoke disappeared from the mirrors there were suggestions that less than half of the $1 trillion was new and committed money; the rest was made up of pre-announced plans or provisional promises of future credits.
4. The US earnings reports could cause a lot of volatility, which will be better for snatching quick profits rather than running positions over. The market has built in lower expectations for the past quarter, but the company outlook statements could be key.
5. Cash calls will test the market’s appetite. Yep, so the HSBC (a rare UK independent bank) rights issue went well. But now there’s renewed talk of rights issues with RTZ , DSG (Dixons) and ITV rumoured to be rattling the charity box in the direction of shareholders (today’s FT mentions a possible £27 billion of cash calls by UK companies this year) and I think this will be a real test of investors’ appetite; don’t forget, there aren’t as many dividends to re-invest this time around.

I don’t have a strong short-term view; this morning has seen a further test of support , but a technical bull case remains intact. The real world is still a mess and I can’t commit myself to long bets for any longer than I can hold off blinking.

Forget the bulls and bears; over the earnings season I’m going to be a bird of prey, hovering out of harm’s way, occasionally swooping down for a kill, then retreating again.

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