American Growth Tops Pyramid of Indicators

I seem to remember that my last post ended with my belief that there was a chance for a market rebound. That was Monday. Now it is Friday. Bad prediction!

I also remember condescendingly looking at financial analysts who were scrutinizing the American economic statistics in search of any sign to indicate an economic turnaround. Rather than poking fun at such a lack of confidence and conviction, I should have done the same. …

In matters of the stock market, we can never be too cautious. Unfortunately, possessing the steadiest conviction is not enough to earn money. Doubt, humility and a minimum IQ are also precious allies!

The return of the index, 40 out of the 3,500 points, means nothing worthwhile, even if it gains support from the 3,780 that correspond to the Fibonacci remarking, 38.2 percent of which occurred since March 9, 2009. The index did not succeed in overflowing the bearish path as measured from the highest levels of April 2010, mid-June 2010 and the ultimate on July 14, 2010. To reach this height, it had to gather speed again to go downward, which it made no bones about doing this Friday, possibly lasting until the start of the coming week.

The S&P 500 Index also did not succeed in surpassing the top of the bearish configuration as of April; this index follows the same calendar as the CAC 40. No wonder, as it sets the pace for all the world stock markets.

The general feeling today is that the markets are midstream across the ford, from the standpoint of both technical and traditional analysis. In the stock market, the prevailing attitude is that signs of economic downturn in the United States deserve to be taken seriously. Without mentioning the threat of “double dip,” which is not proven yet, still the falloff in the United States truly makes the market hold its breath.

A very good reason exists for this reaction: American growth sits at the top of the pyramid of indicators that makes the market trend. Slower growth across the Atlantic is synonymous with weaker global activity, especially in emerging countries, but also in the downward revision of corporate profits.

Now it is August, and from early September onward, the investors will start considering profit expectations for 2011. For this year, there is no need to worry. The base effect of 2009, a very bad year, will be compared to a full 2010, and there were, of course, half-year comparisons. Certainly, the year has not ended, but it stands out rather well so far.

As for 2011, it is different. To increase profits, we must reach a true growth dynamic for the coming year, without which it will be impossible to achieve an increase of 17.5 percent in United Nations profits and 21 percent in the euro area. If there is no momentum, the market will downgrade profits and therefore valuations of shares.

The scenario of low growth is already in process, but what the markets dread is no growth next year. The boundary between slow growth and none at all is tenuous. The first scenario is integrated within the rates and ultimately can be proved favorable to shares, for it guarantees low interest rates, while the second is very worrying, as it may prevent emerging markets from getting the minimum fuel they need for development.

Once more, without mentioning the “double dip,” preoccupations of the markets over prospects in the United States are real. Before saying it is a question of a short-lived “difficult spell” in the process of recovery, one must be cautious in regard to the stock market. Of course, it is not possible to serenely consider market investments without minimum visibility as to the companies’ ability to increase profits, which everybody is expecting for 2011.

Have a nice weekend this July. See you on Monday.