At the beginning of last month I surmised the likelihood was that this bounce would not last. However I thought there was enough optimism in the market mood in the short term despite a dark macroeconomic climate. The 8700 mark the Dow was at that day turned out to be the low for the rest of the month and the index has since consolidated above it.
Ignoring the earnings reports which ‘beat forecasts’ – when you have analysts dropping expectations to nothing that is not an argument to buy shares – the reasons I believe are twofold: An outbreak of Obamamania together with a fall in dollar Libor.
3-month Dollar Libor stands at 1.02 percentage points. It’s fall has been inversely proportional to the rise in the stock market. It may be that bank share prices have been hit so bad their market cap was having a direct effect on their liquidity, maybe even solvency. So the rising tide floating all boats scenario we have seen unfold over the past month has allowed the interbank lending rates to come down. Although it has much to fall to get to the perceived normality of 22 basis points prior to the crunch.
Obama has weathered the storm of expectation and disappointment in his first few months quite well. His finance team seem to be blundering along ok, accompanied by the rest of the Wall St walking wounded. Nobody seems to have wrapped on the general bail out everything at all costs world consensus. That seems to be doing the trick.
But for how long will this sense of benign calm last? The automakers are racing for bankruptcy sometime this summer, the banks look nowhere near ready to remove themselves from their recapitalising drip feed & economic numbers aren’t getting any better. There is also a whole host of other issues with game-changing potential. I believe Libor & consumer sentiment are leading indicators but while they have no doubt improved they are still bad.
From a trading point of view there will be plenty of time to catch the resumption in bear-related activities. Likewise if the governments really have managed to shock the economy back to life with their debt mountains the return to pre-Crunch levels (Dow 9000 for me) will not be a quick one. Lets just sit this one out for now.
Update: The eventual failure of this rally appears to be telegraphed by most reliable commentators. I’m sure many are looking to the stress test report out next week to maybe provide a catalyst for a reversal. I don’t think this will happen. The expectation is that it will require more bank fundraising. No surprises there. And surprises are what will take this market down.