Monday, June 1, 2009

Stocks rally as economy recovers

I'm not a technician, but I understand that when the price of something moves above or below its 200-day moving average, this can be significant. Sure hope so, since the S&P 500 today broke above its 200-day moving average for the first time since this debacle began.

Technical indicators like this always mean more to me when backed up by the fundamentals, which have been pointing to this rally for a long time. It all started with the decline in swap spreads last October. That signaled that liquidity and confidence were beginning to return to the bond market. Then we saw a big decline in the Vix index in December, which signaled that fear was beginning to decline and confidence to return in the equity market. Then spreads on corporate bonds began to decline in January, signaling an improved outlook for corporate cashflows. Then commodity prices started to turn up in January, followed by a surge in shipping rates, signalling the beginnings of a global recovery in demand. More recently we have seen a big surge in 10-year Treasury yields, and a big increase in breakeven spreads on TIPS, both good indicators that the bond market sees recovery rather than deflation ahead.

It's pretty clear to me that the economy and the markets are in recovery mode, so there's every reason to think that the equity market rally is the real thing.

No comments: