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Bear market rejected

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by Peter Switzer

If a market drops 20 per cent, it’s called bear market territory. That means we’re in a bear market and the Yanks have been in it, but it can lead to a rally. That’s what we saw on Wall Street overnight — it was down and ugly but the Dow ended up.

The trigger? A Financial Times story suggested the euro zone finance ministers were looking at ways of recapitalising the banks in a co-ordinated action and that sounds good but it’s hard to get enthusiastic about European promises of 'we’ll set things right'. It’s a bit like believing in the promises of a European gigolo!

The important date for Europe is 13 November and that’s when professional market players expect the EU will outline the plan for rescuing the likes of Greece and the banks that are terribly exposed to these debt-laden countries.

The Dow was down 200 points but finished up 153.41 points, or 1.44 per cent, to wind up at 10,808.71.

The S&P 500, which briefly went into bear market territory, spiked 24.72 points, or 2.25 per cent, to finish at 1123.95.

Another help to the market was when Ben Bernanke, the Fed boss, said he was prepared to help the economy if it needed liquidity. That said, he sees an improving US economy but at a slower pace than the Fed expected in June.

But get this, many US economists think Ben’s assessment is too gloomy. This could set the market up for a nice rise if the Europeans get their act together and the US economy comes in stronger than expected just after US economies report solid profits in coming weeks.

Finally, this is an interesting take on a Greek default. Of the five biggest banks in the USA, there’s a US$54 billion exposure to the PIIGS countries and there is $713 billion worth of capital.

“That does not seem like a world-ending problem,” said Brian Wesbury, chief economist with First Trust Advisers.

The bottom line is that there’s plenty of evidence that a European contagion fear has been overdone and the market sell-off is crazy. This craziness will unwind and I’m still strong on a Santa Claus rally, which could come a long time before the sleigh filled with presents arrives.

All I want for Christmas is a nice big rally! It’s time for a big bear market rejection.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, October 05, 2011

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