About 48 hours ago the world was going down hill quickly. Europe was going to implode, Australian GDP growth had slowed, China was in a bubble (and so were commodities for that matter) and the US was a time bomb waiting to happen. Today, I read the total opposite in the media and commentators that were calling doom and gloom are now jumping on the bandwagon of a so called Santa Claus rally. It is actually a proven trend with December being the best performing month of the lot. This does however go some way to explain the level of confusion in the market at the moment.
Last night the DOW JONES rallied strongly adding 249.76 points (2.27%) to 11,255.78, its largest gain since Sept. 1 and its sixth biggest one-day jump this year. The Standard & Poor's 500-stock index gained 25.52 points (2.16%) to 1,206.07, and the Nasdaq Composite added 51.20 (2.05%) to 2,549.43. In London, the FTSE 100 added +114 points or +2.07% to close at 5642. Locally, SPI FUTURES are pricing in a jump on the open of +62 points when trading kicks off.
The main news driving the gain last night was employment data out of the states (Private ADP Data) which showed +93,000 jobs created in the private sector. This is a strong precursor to the non-farm employment number due Friday which also include Govt stats. The market is expecting +140,000 jobs to be created and this would back up a very strong number last month. To give you some context here, during the GFC, more than 500,000 jobs were being cut a month. Big turnaround and it shows the stimulus is working .
One of the most encouraging aspects of the local market in my view (and I highlighted this to a number of clients yesterday) was the price action on the S&P/ASX 200 yesterday which once again closed above the level of 4580 which we've been tracking for the last week or so. (
SEE CHART). This is clear support at this stage and I guess it shows the value of monitoring price action before making any definitive predictions. I've said that I think the downside move would accelerate only after a break of this level and I think this is still an effective way of managing the downside (the most important aspect of investing).
In saying that, the one thing I hate in the market are those that sit on the fence,( which I've been doing) then insinuate they have been calling a move when it plays out. I still think its prudent to be cautious in this market. One strong day of gains does not constitute a bull market. The employment data on Friday will be central if this market is to rally further and I'm a little concerned the market has already priced in a pretty spectacular number. This would imply the greater level of risk is to the downside.
We also saw stronger than expected Manufacturing data from China yesterday which shows their growth is remaining extremely strong - and confirms our
investment view of targeting emerging markets growth. The only concern here is that if data remains firm China is likely to raise rates to mitigate rising inflationary pressures. India is currently in the grip of rising inflation which is something China will want to avoid.
All in all, the market holding above key support is a major positive. Another positive is the resilience of the market in the face of some pretty dire news flow over the last week or so. My View - Be long the market until it breaks below critical support on the S&P/ASX 200 of 4580 to 4550 depending on your risk tolerance. 1170 is the key level on the S&P 500.
