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Can markets resist gravity?

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by Peter Switzer

No great rally news to report but one thing Wall Street is valiantly trying to do is to defy gravity. It has done enough spiking higher for the moment, but it really has shown that investors are not keen for a sell-off.

But can this persist? The simple answer is yes if the run of good news can keep on showing up.

The latest good news is the reports that Spain might soon request a bailout, which means the European Central Bank will be able to buy Spanish bonds, which will lower the cost of borrowing for the country.

It will also mean that Spain will have to commit to some budgetary demands that could get the government offside with voters, but the net effect should be positive for the country and its creditors. It should also help the euro and take away the threat that Spain – a too-big-to-fail economy – could end up like a Greek basket case.

Over the weekend, the Dow was up 17.46 points or 0.13 per cent to 13,579.47. The S&P 500 was off an ignorable 0.01 per cent – let’s call it unchanged! – at 1,460.15.

Watch the fear reading for stocks in the US – a low 14 on the VIX which explains why there is no sell-off, however, a low on the VIX often can be the calm before the storm.

Helping was the Spanish news and European markets liked what was heard with the German DAX index up 0.84 per cent, while the CAC 40 put on 0.59 per cent.

To put the defy gravity issue into context – US indexes are at multi-year highs and so are our indexes and that’s when you have to expect a testing on stock prices.

While the next earnings season will be a significant test I reckon the main game will be economic data over the next two months. Company reports over the September quarter could not be flash as global economies were so weak that they needed QE3 and equivalent monetary expansions in Europe and Japan.

However, forward indicators should soon show if these money supply strategies have worked to build confidence and to encourage economic activity.

And I think what goes on in China will be really important as the global economy needs Chinese demand to beat the threats of recession and downturn which are still out there.

This week in the US there is a swag of data to watch including: the Chicago Fed National Activity index, the S&P Case-Shiller home price index, USDA food prices outlook, consumer confidence, durable goods orders, GDP, pending home sales, personal income and consumer sentiment.

On the local front there are job vacancies and private sector credit, but the focus will be overseas until next week when the Reserve Bank is expected to cut interest rates!

I think over three months – now to Christmas – markets will resist gravity but there will be tests and that could create a buying opportunity for long-term investors.

Watch more from Peter on SWITZER TV.

Published on: Monday, September 24, 2012

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