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Signs To Watch For The End Of The Rally

This morning the stock market indexes are trading sharply higher to open the week. On Saturday September 11th the Chinese government said that growth continued to expand more than expected throughout the country. Recently, the global markets have been taking their cues from the Shanghai Index(China). When the China data is strong the stock markets around the world seem to inflate and trade higher. It is also very important to note that the U.S. Dollar index will usually decline when the Chinese report this positive economic data. As many of our readers know when the U.S. Dollar Index declines the major stock market indexes will inflate and trade higher. The opposite is true when the U.S. Dollar Index trades higher the major stock market indexes around the world will usually deflate and trade lower. Therefore, the stock market indexes seem to move on the Chinese economic data and the action in the U.S. Dollar Index.

When will China decide to tighten their credit markets again? This is a question that many trades and investors are asking. Earlier in 2010 the Chinese government did make it more difficult for potential borrowers to get credit for second homes and real estate properties. This action coincided with a rise in the U.S. Dollar Index during the the first half of 2010. As the U.S. Dollar Index traded higher the stock market ultimately rolled over. However, in late June the Chinese government decided to loosen credit to potential borrowers for real estate and the markets around the world began to inflate higher again. It is important to also note at that time the U.S. Dollar Index began to decline. Once the U.S. Dollar Index declined the major commodity stocks all rallied sharply higher. Stocks such as Freeport McMoRan Copper & Gold Inc.(NYSE:FCX), and Cliffs Natural Resources Inc.(NYSE:CLF) have risen about 50.0 percent since early July. These are major moves higher in just over two months time.

Let us first tip our cap to the Chinese economy who seems to be clicking on all cylinders. They continue to grow at an alarming rate. However, if the Chinese have looked at past history they certainly know that they do not want their economy to overheat and reach bubble territory. Therefore, it would not be a surprise if they begin to tighten their credit to potential borrowers in the near term future. Should the Chinese make any moves to reign in the loose credit lines it will have a negative effect on the global markets across the board. We shall see what happens very shortly.

Nicholas Santiago
Chief Market Strategist