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Could good news kill good news?

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by Peter Switzer

The Yanks again finished in positive territory on Wall Street, which means we have seen six weeks of rises on a trot. The gains were not excessive as financial markets are playing a waiting game on the European Central Bank (ECB) and the Federal Reserve and the trading day also brought the irony of some positive economic reports for the USA.

Irony? Yes, irony as a lot of this market gain is linked to an expectation that a weak US economy needs a third round of quantitative easing (QE3) — more money supply — and so a better than expected US economy might take away the need for QE3 and therefore undermine this rally!

Market gains

To understand the extent of this rally, CNBC pointed out that the Dow, the Nasdaq and the S&P 500 are all up over 10 per cent since 4 June. Our S&P/ASX 200 index is up 9.7 per cent per cent since 5 June.

If you’re wondering if there’s any sign of shareholder reluctance to accept this rally, well the VIX or fear index is now at 13.47, which is unbelievably low. This says market anxiety is sinking and can only be replaced by the fuel that creates rallies and bull markets — confidence.

Now it’s only good for a rally but if the ECB impresses the market big time, then I think the Fed welching on QE3 could be tolerated without causing a massive sell-off.

On the other hand, if the ECB doesn’t impress and QE3 doesn’t happen, we will see a correction. That said, if the ECB disappoints, it would force Ben Bernanke’s hand and QE3 would be more certain, even if it was seen as being political delivering it so close to the US election in November.

For the record, the Dow ended up 25.09 points or 0.19 per cent to finish at 13,275.9 while the S&P 500 put on 2.65 points to end at 1418.16.

Rising confidence

On the US economy, consumer sentiment was up with the Thomson Reuters/University of Michigan consumer sentiment survey hitting a three-month high, driven by low mortgage rates and solid retail sales. Also, leading indicators rose in July with better job figures and an improving housing sector boosting these numbers after falling in June.

Greasing the wheels of this rally have been supportive statements from the likes of German Chancellor Angela Merkel for the ECB boss Mario Draghi, and this is building up the expectation that the Europeans will deliver.

This week the Americans will see what’s happening to housing, which is important to the US recovery and this rally. This will test out my suspicion that good economic news might not bring good market news in the short run and could hurt this rally.

However, if the ECB and the EU leaders come through on top of a US economy getting better under its own steam, especially with housing on the mend, then we could see the bear market buried, if it’s not already in the grave waiting for the grave diggers to toss in the dirt.

Make it or break it

Over the next four weeks we should see the makings of a bigger rally or big sell-off — we’re closing in on make it or break it territory for stock prices.

Even though I worry a little bit about good economic news killing good market news, I’m more worried about bad ECB news killing good market news and good economic news!

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: Monday, August 20, 2012

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