The financial markets built upon the macro themes of the past week, as better than expected economic news from China and the USA lifted the equity markets. The GM bankruptcy filing was completely ignored by the market. The reflation trade was back in full force, and Treasuries were sold hard, with yields getting close to the highs of last week. The Dollar also fell though it finished off its lows. The SPX smashed through its 200 Day SMA and closed at the high for the year, along with the Nasdaq.
Technical Buy Signals: Possible Explanation for Futures Spike?
The strong monthly close on Friday, coupled with the open above the 200 Day Moving Average (on the S&P) triggered a lot of technical buying in the market. Fund managers who were waiting for equities to reach the 200 Day SMA jumped in with their cash. A lot of bears, who were shorting the market near the 200 Day SMA, had to cover.
The buying pressure was also aided by calls by several Market Gurus including Michael Belkin indicating that we are now in a global bull market for equities. The Coppock Guide, one of the oldest Market Timing signals, also issued a buy. This flurry of technical buy signals might be the reason for the spike in future purchases at market close on Friday.
Economic Data Impresses the Market
The overnight session started off on a very positive note with both the Chinese PMI surveys coming above some cautious estimates. There were expectations that the PMI would show a renewal of contraction in China, leaving a lot of disappointed bears. In the US personal income and spending data, the ISM Manufacturing survey, and Construction spending all came above expectations.
Equities were led by energy and materials names which were aided by the weak dollar. Treasury bonds were sold hard as fear of inflation is finding a receptive audience; though oil finished up gold finished lower. Most major equity indices closed at the high of the year.
Banks Raise New Capital
During the past month or two, a capital raise by banks has been a remarkably accurate buy signal for the general market. Yesterday JPMorgan (NYSE:JPM) and American Express (NYSE:AXP) announced that they will sell equity to repay TARP. Our trading experience would be much more profitable if the banks would pre-announce their capital raising announcement.
The equity indices finished strong, and it is likely that the momentum will spill-over to Tuesday. However rising treasury yields has led many to doubt whether the economic recovery underpinning the equity markets rally will ever materialize. Yesterday, at least the markets ignored the yields and went up across the board. The path of least resistance is up and there is no point fighting it. The VIX went up yesterday in spite of the rally, showing that at least some market participants are not convinced about the sustainability of the rally, even though they may be forced to participate in it. I plan to close out my short term bearish put positions on any sign of weakness.