Sunday, February 19, 2012

Are the Markets "Breaking Out or "Breaking Down"?

“Quantitative easing” by the European Central Bank in mid-December triggered the current market rally.  Since then, 1) U.S. economic data has improved (increases in manufacturing, decreases in unemployment claims and recent stability in the housing market), 2) the Bank of Japan continues to provide monetary stimulus to avoid deflation in its economy, 3) China may provide assistance to the Eurozone and 4) a meeting of Eurozone finance ministers on Monday may clarify what happens with Greece (but promises have been made before).

Within this mix of cross-currents, many markets have moved higher benefiting from monetary intervention (printing money) rather than changes in fiscal policy (addressing government debt issues), but trading volumes have been low.  The bulls suggest that the lack of investor conviction is associated with the early stage of an economic recovery.  At the same time, recent weakness in the Dow Jones Transportation index (perhaps impacted by increasing oil prices) as well as a decline in the price of copper may suggest that short term market momentum slowing.  Investor reaction to Monday’s meeting in Brussels (will they bailout or blowout Greece?) will likely influence the direction of global markets.

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