At face value, the latest rally in equity markets is a very positive sign. Macroeconomic data has been showing signs of improvement and oil bounced strongly off its 100 day moving average on July 15th. Even Earnings Season has been relatively positive. Barring a couple of nasty surprises some solid companies, such as Apple, gave surprisingly bullish reports.
However I am still not buying it.
Back in May I wrote that the Dow was likely to hit 9,000 by the end of July. It has now achieved this. If you tune into any of the euphoria on most business media channels you would be forgiven for believing that 10,000 is just around the corner. Talk of this being a bear rally has been shoved to the sidelines as a procession of traders and other assorted talking heads have been excitedly announcing the bullish sentiment out there.
However what no-one seems to have picked up on is the lack of volume in the market. To give a rough idea ,volume has been roughly two thirds of what it was from March to early May this year (the first stage of the rally) and one third to half of what was seen during the heavy selling from October 2008 to February 2009.
Unless there is a notable pick up in volume then this rally is inevitably going to run out of steam.
We need to see what happens now towards the end of August, but I still have serious concerns about the strength of the bond market. The various stimuli plans across the World are still wholly reliant on bond sales. So far there have been few signs of serious weakness in demand, but we are only halfway through the year. For me September/October will be the crunch time. If the bond market fails to soak up the need for capital to underpin the financial system, then this will likely be the catalyst for the next collapse in equities.
I know this is still a very pessimistic view, but I just don’t believe the worst is behind us yet. It can’t be….