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Prieur Perspective: Stock Uptrend Resumes as Economy Rebounds

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Investor confidence in the recovery of the global economy gains traction.

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The key moving-average levels for the major US indices, the BRIC countries and South Africa (where I'm based) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average just more than a week ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish "golden crosses" established when the 50-day averages broke upwards through the 200-day averages.

The short-term support levels for the major US markets are as follows: Dow Jones Industrial Index (9,135), S&P 500 Index (980) and NASDAQ Composite Index (1,931).



David Fuller (Fullermoney) from across the pond said:
"The end game for this bullish phase [on stock markets] needs to be considered well before the event. While the timing is largely guesswork at this stage, the usual causes are not. Bull markets are usually assassinated by tighter monetary policy.

"A good, although not precise, indicator of bear market risk will be provided by the yield curve, currently showing the premium of US 10-year over 2-year government yields. Years often go by before this chart shows anything important but it should not be forgotten by any of us. When this next approaches 0.0, we should have at least trailing stops, mental or actual, for all of our equity long positions. When it inverts to negative, indicating that 2-year rates are higher than 10-year rates, and the longer it stays negative, the more we should assume that a bear market is approaching.



"The good news today, is that the next inverted yield curve is probably years away. Consequently, it would most likely take a true 'black swan' to derail the current bull market anytime soon. These are unpredictable by definition so I would not worry about them without evidence of a game-changing event. Meanwhile, setbacks in response to normal 'wall of worry' market volatility can be regarded as buying opportunities in favored assets."
I've discussed valuation levels and technical indicators in my recent posts (see below), but another factor that will come into play is seasonality turning negative. Focusing on the S&P 500, I've done a short analysis of the historical pattern of monthly returns for this index from 1957 to mid-2009. The results are summarized in the graph below.



If one looks at the average return per month and in which months the most market declines have occurred, it seems as if the months of June, August, and September are traditionally bad for stock markets. Although June this year played according to script, with the S&P 500 showing a zero return, July excelled with a 7.4% gain. August (+3.9%) is comfortably ahead of the norm but, given the overbought level of markets, it's conceivable that the "bad" month of September -- over time the month with the lowest average monthly return -- might conform to the historical pattern
No positions in stocks mentioned.
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