First posted 09/12/09

What to make of the S&P 500 (index of leading US shares)? On the downside, economic data are mixed; the AAII sentiment survey shows that investors are bullish (which is bearish — they have already bought); the NYSE short interest ratio is still falling (which is bearish — it means that bears have scope to short equities from here); and the S&P 500 seems to have stalled at a resistance level of 1111. On the upside, the Fed is once again emphasising that rates are going to stay lower for longer, and liquidity remains abundant (on Bloomberg Financial Conditions Index, US BBB Spread, M1, M2, and Fed balance sheet size; Fed experiments with reverse repo are small-scale and the talk of withdrawing liquidity is just talk at present). I think that liquidity is the overriding argument and am inclined to buy the S&P 500 above 1130 (once the market tells me I am right).

So, what about the Nikkei? Day to day, it moves in a similar way to the S&P, but it has established a downtrend and failed to make it through a resistance level. There is a fundamental story here: although the Nikkei ran up with other global markets in Q2, Japan does not have quantitative easing in place, the new government does not appear to have a plan for cutting the deficit, everybody knows the demographics are awful, Asian trade (ex China) is looking somewhat weak and the yen is still too strong. So there is not strong domestic liquidity support and the negative outlook means that foreigners are unlikely to buy. I am inclined to go short today. I am worried that, if the S&P does break out to the upside, the Nikkei could do the same in the short term and hit my stop; I think this is just the kind of risk you have to take…


Update: I didn’t mention the new Japanese fiscal stimulus. Could it support the Nikkei? At $80bn, it is less than Mr. Obama’s planned top-up to the US stimulus using TARP funds. The original US stimulus was $787bn. I don’t think this will be seen as a positive development for the market: it won’t make that much difference to the economy, and it makes the fiscal position even worse. The Nikkei seems unimpressed.