aarc

Week in Review, Part I: Global Economics, International and U.S. Equity Markets Overview

China's Shanghai and Shenzhen indeces and the Taiwan $TWI index are the only green shoots in this otherwise weed infested global economy.

They have been springing greens shoots since October of 2008. 6 months of back-to-back rally cannot be discounted as a "bear rally" but rather can be categorized as a sustainable recovery rally. Shanghai was able to achieve 54% rally since Oct 2008 and the Shenzhen index 92%. Those are the A-shares. The B-shares are able to go much higher than the A's.

That is something not lost to international investors. Such massive rallies will generate massive re-investments into China. Just wait for a pullback in order to enter.

China because of their $600B stimulus package which is equivalent to $1,800B to the US since US GDP is 3x bigger than China's. Just imagine what $1.8 Trillion of stimulus package can do for the US if the Obama Team simply matched that of China's on the per GDP basis. But then the US can't possibly afford a $1.8T stimulus package.

And China is using that $600B on infrastructure projects which are much more stimulative than the US's $787B to be used basically on pork barrels since the US is already a well-developed country and may not need extra infrastructure projects but rather the usual maintenance jobs of those infrastructures which is not stimulative but rather preventive.

Taiwan is getting the boost because of the perceived easing of trade barriers against China. $TWI was able to rally 53.50% so far from Nov 2008 lows. It is going to need a minor consolidation before the next small rally on the weekly chart. After that, a bigger consolidation will be needed in order to support a bigger rally.

US and Europe are in no shape to recover immediately. Their economic fundamentals do not support a sustainable recovery and that show quite clearly on the monthly and weekly charts of the Dow Jones, SnP, Compq, DAX, CAC.

Likewise, the monthly and weekly charts of Japan, Hongkong, Korea, India, Australia, among others are still in shaky grounds and are more likely to go down to lower levels. Those countries are basically being driven into an unknown direction with China being bullish on the long-term and the US and Europe bearish in the intermediate terms.

The low volume in the US indeces during the last 2-3 weeks is because of a running consolidation some traders are calling a wedge but is starting to morph into a running triangle specially for Dow Jones daily and 240-minute charts. (See my previous posts on how this type of triangle usually resolves.)

China is going to finish or complete the current 6 months of back to back rally very soon. Rallies do not go on forever, corrections do and will happen no matter how bullish the rallies are. Besides, bigger corrections are needed in order to sustain bigger rallies in the future.

China's impending correction on the weekly chart is going to produce massive downward pressures to the Asian countries' stock markets including Japan. Then their "shaky" green shoots' viability will be subjected to the acid test specially if the US and Europe go into another sell-off as China goes into a pullback.

The US has been showing some "green shoots" lately. Late already as compare to China's and still highly questionable as to sustainability. Impressive as it is with 28.4% price appreciation since March 2009; Dow Jones' 8 weeks of tentative rally does not make a sustainable recovery.

Dow Jones will need to go over 10,590 on a sustained rally with minor corrections in the weekly chart before it can be considered safe and sound with more than 90% probability of sustainable rally in the years ahead. Minimum 1145 for that of the SnP500.

A minimum 63.70% rally from the March 2009 low. A tall order with very little chance of becoming a reality at this stage. We'll believe it when we see it.

This is not a garden-variety recession where 20+% rally means the end of the bear market. 28.4% rally for Dow Jones does not mean the Bear Market has already ended.

The western world is still deleveraging or "going back to basics" - Back to the Past, not the Future.

Next year perhaps, we start going back to the future.

China and the rest of the developing world are going more for bricks and mortars in replacement for their mud-huts and bamboo houses. They still have a lot of ways to go towards becoming developed or industrialized countries with the attendant consumerism boom in their respective countries needed in order for them to sustain their economic growth outside of the US and European consumers.

Thus, they are expected to resume their early 2000's rally with perhaps less vigor this time around since the US and European consumers will not be the same again for quite a long time to come.

Hopefully not until next year's expected rally, if it happens, will we be more comfortable that the US problems are psychological rather than systemic.