Market update for week of June 29

Evan R. Guido Financial Advisor

Bottom Line:

• • Global Trends Improving
  • Market Technicals Favorable
  • Emerging Markets Leading
  • Central Banks Still Pumping in Liquidity
  • Commodity Bull Market Likely to Persist

Global Trends Improving.

While the rally in the global stock markets, on an absolute basis, has stalled in recent weeks, longer-term trends have continued to improve, and relative trends show continued leadership by the emerging markets.

The number of global indexes making new highs has dropped significantly in recent weeks, from 48 (of 50) trading at new 13 week highs in early May to only four last week.

At the same time, however, the number of indexes that have seen their 10-week average cross above their 40-week average has risen from nine to 48.

From the perspective of individual stocks, even with the recent consolidation, nearly 70% of individual global stocks (in the Ned Davis Research Global Composite) are trading above their 10-week averages and nearly 75% are above their 40-week average.

Taking a composite view, our international index trend indicator has continued to surge and is at its highest level since November2007. So while the price action has moved into a consolidation phase, upside participation remains broad and the trends have become increasingly positive, both necessary elements if the trading range of the past six weeks is to be a foundation from which the next leg of the global rally is to proceed.

Market Technical's Favorable.

In fact, while this consolidation phase has meant a dissipation of positive momentum, the technical condition of the global equity markets is in some ways more bullish now (with trends rising and oversold conditions emerging) than in early May (when the trends were more bearish and overbought conditions were widespread).

Strengthening the bullish case has been the return of skepticism and pessimism. Put buying has been robust, and the latest data from the AAII shows more bears than at any time since the second week of March. Some money has flowed back into equities, but many investors appear to have missed the initial rally, and the reluctance to miss another move higher is a powerful motivating force that could bid stocks higher.

Emerging Markets Leading.

The relative trends have remained intact and show continued leadership in emerging markets relative to their developed counterparts. Even with the relative pullback seen since the peak earlier this month, the ratio between the emerging markets index and the developed market index is above the peaks seen in the late-2007 / early-2008 time period.

Not only are economic recovery prospects better in the emerging markets than the developed markets, but on a more technical basis, the higher-beta emerging markets would be expected to see outsized gains if, as expected, the global market rally resumes this summer. Our relative strength rankings confirm this trend in the emerging/developed market ratio.

Only two developed market indexes make it into the top 19 spots in the current rankings, and these two (Singapore and Hong Kong) are both linked to the emerging power in China, which was the only one of 50 indexes that made a new 52-week high last week. Regional leadership remains tilted away from Europe, for both developed and emerging markets.