Stock market in 2010

December 29, 2009

Stock markets worldwide have, for the most part, retraced roughly 50% of the falls from their peak in autumn 2007 to their lows in March of this year.

The Japanese Nikkei is the exception. From a high above 18,000 it fell to a low around 7,000 and bounced to about 10,700. Retracing barely a third of the falls, it must be the worst performer of the major indices. That's Japan and entrenched deflation for you.

The rest of the world has done rather better. But can this continue?

Global stock markets have recovered around half of the losses sustained in the financial crisis. In Hong Kong, the Hang Seng has done even better, going from a high of 32,000 to a low of 10,676, before bouncing to a high last month of 23,000. That's a retracement of almost 60%.

Meanwhile, in Germany, the Dax went from 8,151 to about 3,588 and made it back to 5,888. That's as near as damn it a 50% recovery, which is also what we have seen in our FTSE 100, and in the Dow and the S&P across the pond.

But at that 50% level, this rally has petered out. It appears to have run up against a wall, which it just can't get through. The FTSE, for example, has been pushing up against that 5,300-5,400 level since as far back as mid-October, but it just can't seem to burst through.

Meanwhile, the US dollar, which, as we have noted before, has recently been doing the opposite to virtually everything else - stocks rise, commodities rise, precious metals rise, the dollar falls - has started to stage quite a recovery. It's moved from just above 74 to 77 on the US dollar index (which measures the dollar against a basket of other currencies).

Given this rally, you would have expected stock markets to move commensurately lower. But they haven't. I am a bear, but that is a display of strength on the part of the stock markets.

There are two possibilities. We could be building up for another move up into the spring. Or we are in a lengthy topping process and will soon be seeing markets rolling over. I'm in the latter camp - but I'm not ruling out the former.

This rally – now some ten months in duration – is one of the greatest rallies we have seen in the markets, both in length and magnitude, since the 1930s. It's natural to at least pause for breath. A slow down is not surprising.

But you could also argue that this whole rally has just been a rather large pause for breath – a gasp – in the vast deleveraging process that is still ongoing, as we pay down the unprecedented sums of debt that have been built up over the last three decades. We shall see.

Having called the March low in the stock markets to the day (here's the Money Morning I wrote back then: Stock markets are about to rebound sharply my calls on the stock market have been off in recent months. I have been too bearish. But I can't help it.

The internals of the stock market are not good, in my view. The moves higher are being led by fewer and fewer stocks. The tech stocks, for example, are strong. But other important sectors within the markets are breaking down. The banking stocks, the house builders, and oil and gas are all in downtrends.

I am reminded of late 2006 and 2007. More and more news was coming out about problems in US housing and the debt markets, yet the markets kept on rising. This time around the issue seems to be sovereign debt with more and more bad news coming out of the likes of Dubai, Greece, Spain and eastern Europe and the Baltic states. We appear to have got away with it so far, but I am pretty confident problems are lurking just around the corner.

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