Equity markets holding up very well

Over the last few weeks, there were numerous reports that the economy of many countries would be in a severe & prolonged recession, with recovery expected only in 2010-11. More gloomy prognoses were reported and they were no longer issued by the usual doomsayers, such as Roubini, Marc Faber, etc. Even the dreaded word "depression" is being used frequently enough- by Merrill Lynch; by Gordon Brown (probably, a slip of the tongue); by an Australian professor; and even by the IMF chief. What is a bit surprising is that the equity markets seems to be ignoring all these negative reports.

We shall look at the performance of 2 important markets. Firstly, the US markets. The S&P500 appears to have established a new short-term uptrend line, with support at 820. Relief rally may happen but I expect the upside be capped at 950.


Chart 1: S&P500's daily chart as at Feb 9, 2009 (source: Stockcharts.com)

What is more interesting is the performance of the Shanghai's SSECI, which has put in a surprising strong move after the Chinese New Year holidays. The SSECI has convincingly surpassed its December 2008 high of 2100 yesterday. A mini-golden cross may occur soon, with the 50-day SMA look set to cross above the 100-day SMA. As such, the near-term outlook for SSECI is fairly bullish.


Chart 2: SSEC's daily chart as at Feb 9, 2009 (source: Stockcharts.com)

The performance of the equity markets vis-a-vis the negative news flow can be read as a bullish divergence. It may point to a mild recovery in the equity markets in the weeks ahead.