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Technical Action Confirms Uptrend is Resuming

The recovery high in markets was seen last April and the market sell-off saw lows reached on 6th July. A recovery high from that sell off was reached on 9th August last. In the key US market both the Dow and the S&P 500 indices have now bettered that 9th August recovery high. This is strong market action and, in my view, the probability is high that the recovery in global equity markets that started in March 2009 has resumed. The final confirmation would be if the key US market could better it's April highs (see chart further down in the bulletin).

S&P 500 - 30 & 50-Wekk MA - Sept 2010Forget what you read in the media or other people's opinions, no matter how well argued. The fact is that the market action tells us that, on average, investors are buying and not selling. That is our clue as to the likely business conditions ahead, which the average investor is increasingly bullish about.

And look no further than this week's comments from the Federal Reserve in the US and the Bank of England - they will continue to provide an accommodative monetary backdrop by buying their own government bonds thereby lowering long term interest rates and providing ongoing liquidity - in other words 'Money Printing'. When they buy bonds in the market place the seller is left with cash - and will invest that cash in other assets looking for a return. So the stronger performing trends will attract the new monies (created by central banks) - expect precious metals to continue rising, the dollar and sterling to remain weak and other real assets such as equities and property to benefit too, and particularly in the emerging markets which did not have a banking crisis, where government finances are healthy, where savings ratios are strong and demographic trends support growth in domestic consumption.

The fresh monies printed by central banks should find its way into the real economy and not just into assets. But in the developed world, it is taking an unusually long time to feed into an uplift in real economic activity because of the after effects of the global banking crisis. But the developed markets are not the world and Asia, China, India and Latin America are booming. Companies, whether they are US companies or otherwise, with exposure to these booming regions are benefiting.

Ireland, of course, remains in the doldrums and it is concerning to see the 10-year bond yield pushing further up to near 6.8%. While the government raised its targeted €1.5 billion of medium term money during the week international investor concerns about our solvency remain. In effect, interest rates in Ireland are rising just when we least need it. In 2000, when we joined the Euro, interest started a new decline just when we least needed it. I am surprised the ECB is not in buying Irish bonds. After all, if the ECB has signed off on our recovery plans (which include Nama) why would it not assist at a critical juncture if the citizens and government are doing all they can to sort the issues !

What to Do ?
If you have not sold out of markets in this difficult past six month phase, then well done. It has not been easy. If you remain on the sidelines, it is always difficult to get back in at higher prices. Markets do not go up in a straight line (although they often fall like that) and we may see some near term corrections here - but they are likely to be modest. If your investments are primarily Irish equities then I understand it is very difficult to sell at such low prices - perhaps some incremental changes may ease your mind.

Buying a global Equity ETF and perhaps some exposure to the Asian, India, China and Latin American emerging markets should allow you to participate in any upside. Just select from the list of equity funds and ETFs covered over the past nine months - click on the link provided or go to 'Investment Solutions' at the top left, click on the Icon and scroll down to 'Funds Analysed'.

Rory Gillen
25th September 2010