01 May 2009

The magnificient 7 and equity markets

After a 2 month rally what steam is ahead?

In their newsletter, Global Thematic Investors (GTI), Bruce Albrecht and Iain Little designed 7 key indicators technical and behavioral, mainly centered around the financial sector that is at the root of the current crisis. Other indicators cannot be dismissed, like money supply, the USD/EUR rate, etc., but these will be key to pinpoint any recovery.

Let's review these 7 indicators.

S&P 500 Banks index: problems started with the US banking sector and will end with it. The index bottomed out in March and is now posing. Positive.

Global 1200 financial index: This is a good proxy to the world banking system. It has also bottomed out in March and is now consolidating. Positive.

TED spread (LIBOR USD 3 mth - US 3 mth T-bills): The trust in the financial system has come back with TED spread sharply down from the October/November panic. After hovering around, 1% it is now falling below it and will soon test the June 2007 and May 2008 level. Positive.

USD US bank BBB 10 yr - US 10 yr yield): The stress in the US financial sector is still high but topping. Still much too high and not fully convincing. Slightly positive.

OEX volatility: Confidence is slowly coming back with OEX volatility well below its peak. It still needs to decrease further and will soon test July2007-July2008 levels; it has to break these peaks. Middly positive.

S&P Case Shiller house price index: Due to its relationship with the financial crisis and the broader economy, it will be key to a sustainable recovery. The housing market still falling (143.17 in February) but at a lower pace than previously. Not bottom yet however hence still negative.

Oil price: Low oil price is adding consumer purchase power. Oil prices have bottom out late 2008 early 2009 and moved up to hover round $50/b. As soon as the economy shows signs of moving again, oil price will zoom up but still positive.

As a whole, the fundamentals look much more promising than 2 months ago. My belief is that we witnessed the bottom in November last year, but will see the market consolidating rather soon for a couple of weeks/months after a very good rally.

Cash is no longer king. It is time to look at markets and where to invest. I will review this in a forthcoming article.