Equity markets in North America have continued to climb this morning, building on overnight overseas gains and continuing the upward momentum started by Friday’s big late-day rally in North America. News that the U.S. government has stepped in to bail out Citigroup (NYSE: C, Stock Forum) appears to have been well received. Citi rallied 62.5% today on the bailout news, a far cry from two months ago, when bailout news tended to be greeted with fear and uncertainty driven market selloffs.
This suggests that a significant underlying change in sentiment may be underway among investors from fears over the health of the economy, to cautious optimism that change may be coming soon and that steps are being taken to improve economic conditions. Some of the renewed confidence may be related to a news conference scheduled for 12:00 pm today where President-Elect Obama is expected to outline a major new economic stimulus package and announce his nominees for key economic posts in his administration. With the markets having responded favourably to indications of some well known figures to key positions, such as New York Fed Governor Geithner and former Treasury Secretary Summers, these announcements may help to boost investor confidence.
Bringing in well known people to key economic positions may help to improve investor confidence in a number of ways. First, recall that one area that the former Clinton administration may have been fondly remembered was in the area of economic management, particularly relative to the outgoing Bush administration. By including members of the former Clinton team and others who hold well-known track records and positions on the economy, uncertainty over the economic direction the incoming administration may be reduced. In addition, including well known current or former public servants may also reduce the risk of the delays from the Congressional approval process. Note that reports do not seem to suggest the inclusion of former Fed Chair Volcker on the team at the moment, although the way central banks and governments seem to have been printing money and cutting interest rates of late to boost the global economy, his expertise in fighting inflation may be needed later.
There are also a number of technical reasons to suggest that a significant change in equity market sentiment may be underway. Last Friday, the Dow Industrials successfully retested support at 7,500, completing a double bottom near the 2002 low. At the same time a rare reverse head and shoulders pattern appeared in the MACD indicator, suggesting a significant positive change in momentum may be underway. Similar patterns also appeared in the S&P 500 (SPX500 CFD) and the NASDAQ 100. With today’s advances, equity indices appear to have broken out of three-week downtrends, also a potentially bullish sign. Initial resistance levels appear near 8,500 and 8,900 for the Dow Industrials, 850 and 910 for the S&P 500, and 1,150 and 1,200 for the NASDAQ 100.
While the stage appears to have been set for a significant potential equity market rebound, there are still a few hurdles that may need to be overcome. First, it remains possible that some investors may still view today’s expected announcements as an opportunity to sell into the news that has occurred frequently of late. Second, with market activity expected to drop as the week progresses due to the U.S. Thanksgiving holiday on Thursday, upward momentum may stall at some point. Because of this, trading later today and then later in the week may give a better indication of whether the advances of Friday afternoon and this morning have been another bear market rally, or a sustainable positive shift in sentiment.
Canadian equities, meanwhile, appear to be responding to today’s rallies in commodity prices. The S&P/TSX 60 broke through 500 in early trading, and has been testing 510, a key former support level. After that, next significant resistance does not appear until closer to 540-550.
Commodities also have attracted significant new interest today, suggesting that while investors may be gaining confidence that the global economy may recover at some point, there also appears to be increased recognition that a recovery may come at the price of higher inflation. Copper, widely considered to be the most economically sensitive metal, has rallied through the $1.60/lb and $1.70/lb levels, while crude oil continues to hold above $50 and has also been climbing, which suggests improved sentiment toward global demand conditions. Meanwhile, precious metals have soared today with gold breaking through $800/oz and silver decisively moving back above $10/oz, which suggests that some investors may also believe that steps taken to boost the global economy may be inflationary. Next resistance for gold appears in the $900-$925 range and near $11/oz for silver.
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This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision.
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