Bull v Bear – weighing up the next move

3 mins. to read

Following the sharp up move in global markets last week, and as we flagged in advance here– http://www.spreadbetmagazine.com/blog/sentiment-indicators-point-to-rally-in-the-days-ahead.html it’s time to look a the weighing machine on the bull & bear side…

Bull points

1. Uncertainty is decreasing.  It looks like some type of resolution will take shape regarding the fiscal debate in Washington. It seems we were not alone in our thinking with the S&P 500’s enjoying its best weekly performance since June.  In geopolitical news, a cease fire has been declared in Gaza. Decreasing conflict in the region means cooler heads are prevailing. 

2. Risk markets are ripe for a tradable bullish move given that the S&P 500 is extremely cheap when looking at current P/E ratios. In fact, in a valuation illustration that would surprise many, it would need to rally 26% just to reach the average P/E of bull markets dating back since the 60s.Meanwhile, trends in insider trading are hinting at a sustained rally to come.  Mainstream investors are entirely too pessimistic on longer-term earnings growth, yet sources of future growth are around us and increasingly evident in recent months data, particularly on housing in the US. 

3. Global growth will be the recipient of a welcome surprise in China we think, where a rebound is gaining strength as per HSBC’s latest PMI reading, increasing to 50.4 from 49.5 and marking the metric’s first expansionary reading in more than a year. Meanwhile, “The German economy is holding up well in face of the euro crisis” and ECB officials signal that the central bank is willing to forgo $9 billion in future profits on its Greek holdings, a sign of understanding that some relief will need to be given to periphery countries. 

4. U.S. economic growth is increasingly being supported by a rebounding housing market. The National Assocation of Homebuilder’s Housing Index rose to a 6 and a half year high last month. Existing home sales for October surprised to the upside and upward pressure in home prices may be the reason for improving consumer confidence. Rising Housing Starts indicate that the housing industry is becoming more confident in the recovery. 

Bear points

1. Investors are like frogs in an increasingly hot investment environment.  Europe continues to show signs of disunity and infighting as EU finance ministers are unable to agree on a revised version of Greece’s fiscal consolidation plan or approve to extend the country’s public debt target.  Meanwhile France’s AAA rating is history as per Moody’s.  ncreasing investor skepticism doesn’t bode well for lawmakers as eventually financial markets will force the issue.   

2. Confidence in the global recovery is evaporating.  U.S. Tech companies are feeling the effects of a slowing global economy. Meanwhile, China reports that foreign investment in the country has fallen for 11 of the last 12 months. Meanwhile, Japan reports a 6.5% plunge in October exports (exports to the EU cratered 20% YoY). 

3. As if critical damage due to a slowing global economy wasn’t enough, the U.S. economy is also contending with a crisis of confidence due to the Fiscal Cliff concerns. Investment is falling off a cliff as companies pull back on business spending. Despite a higher trend in Michigan’s Consumer Sentiment index, weakening momentum is causing alarm. 

4. Cooler heads may seem to be prevailing in the Middle East, but the longer trend is of more hostility. Meanwhile tensions in Asia remain elevated and territorial claims dealing with the South China Sea are likely to exacerbate fissures in the region. 

On balance, we are happy to take profits on the recent months and look for any weakness driven by returning fiscal cliff worries to accumulate long plays in selected stocks again. Another way to play matters would be per out suggestion on page (93) of our latest editon – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v11_generic in which we outline an Options strategy to minimise your downside but still enjoy maximum upside.

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