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This Week: China’s “Commodity Colony” Stock market trend: Up, Seeing to Break Through Key Resistance Levels Market Pulse Last week, my market pessimism got run over by an Australian rate hike as the U.S. stock market shook off a two week slide and powered up another notch. Once again, the key resistance level of 10,000 on the Dow is in sight with the Dow’s 4% gain last week. Since Australia’s rate hike was such a catalyst for that mini-bull run last week, it’s worth understanding the bullish logic behind. The logic hinges on the argument of Australia as a bellwether of recovery and reflation in the broader global economy. To put this in more concrete terms, if Australia needs to raise interest rates, it must be growing robustly and if its growing robustly, other countries in the region must be growing as well. It follows that if Asia is growing, the rest of the world must follow. Ergo, global markets shall boom. Let’s try on the bearish counterargument, however, for size and see whether the bullish or bearish shoe fits. In truth, Australia has become one of China’s most important “commodity colonies.” Down under is merely as extraction pit for the coal, ore, and other raw materials needed to fuel China’s factory floor. Since China has undertaken the most massive and effective fiscal stimulus of any major economy and since its growth has been well above projections, it’s no wonder that one of its most commodity colonies is booming too. However, it doesn’t necessarily follow at all that the rest of the world, or even the rest of Asia, will be booming as well any time soon. In fact, the big danger is a collapse in what some are describing as an emerging bubble in China. Ergo, global financial markets won’t be booming anytime soon. Perhaps the best argument for the longer term bearish interpretation of Australia’s “canary in a China coal mine” moment on the world financial stage is this observation from Market Edge about last week’s allegedly bullish move: “The technical condition of the market deteriorated once again last week as the CTI lost another point, the Momentum Index, which gained some ground, remains in negative territory and the Strength Indexes fell into bearish ground. Despite last week's broad based advance, the negatives still outweigh the positives at this juncture suggesting that the market is vulnerable for a setback.” I remain primarily in cash with a hedge on my long positions to see how the “Pisani Paradox” is ultimately resolved. Only when we break through key resistance levels and the fundamentals improve will I try to leverage the current up trend. The next few weeks will help clarify the picture as its “earnings season” once again. Just remember here to ignore actual earnings and focus primarily on how companies are “guiding” for the next few quarters. ©
2009
Peter Navarro CONTACT
INFORMATION DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance. |
