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Stock Market Seeking to Break Through Key Resistance Levels

Stock-Markets / Stock Index Trading Oct 11, 2009 - 12:51 PM GMT

By: Peter_Navarro

Stock-Markets

Last week, my market pessimism got run over by an Australian rate hike as the U.S. stock market shook off a two week slide and powered up another notch. Once again, the key resistance level of 10,000 on the Dow is in sight with the Dow’s 4% gain last week.


Since Australia’s rate hike was such a catalyst for that mini-bull run last week, it’s worth understanding the bullish logic behind. The logic hinges on the argument of Australia as a bellwether of recovery and reflation in the broader global economy. To put this in more concrete terms, if Australia needs to raise interest rates, it must be growing robustly and if its growing robustly, other countries in the region must be growing as well. It follows that if Asia is growing, the rest of the world must follow. Ergo, global markets shall boom.

Let’s try on the bearish counterargument, however, for size and see whether the bullish or bearish shoe fits.

In truth, Australia has become one of China’s most important “commodity colonies.” Down under is merely as extraction pit for the coal, ore, and other raw materials needed to fuel China’s factory floor. Since China has undertaken the most massive and effective fiscal stimulus of any major economy and since its growth has been well above projections, it’s no wonder that one of its most commodity colonies is booming too. However, it doesn’t necessarily follow at all that the rest of the world, or even the rest of Asia, will be booming as well any time soon. In fact, the big danger is a collapse in what some are describing as an emerging bubble in China. Ergo, global financial markets won’t be booming anytime soon.

Perhaps the best argument for the longer term bearish interpretation of Australia’s “canary in a China coal mine” moment on the world financial stage is this observation from Market Edge about last week’s allegedly bullish move:

“The technical condition of the market deteriorated once again last week as the CTI lost another point, the Momentum Index, which gained some ground, remains in negative territory and the Strength Indexes fell into bearish ground. Despite last week's broad based advance, the negatives still outweigh the positives at this juncture suggesting that the market is vulnerable for a setback.”

I remain primarily in cash with a hedge on my long positions to see how the “Pisani Paradox” is ultimately resolved. Only when we break through key resistance levels and the fundamentals improve will I try to leverage the current up trend.

The next few weeks will help clarify the picture as its “earnings season” once again. Just remember here to ignore actual earnings and focus primarily on how companies are “guiding” for the next few quarters.

Navarro on TheStreet.com
Click here to review my videos on TheStreet.com.  
———-
Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy.
Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.
Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2009 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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