Follow the Emerging Leaders

04/27/2009 12:01 am EST


Eoin Treacy

Global Strategist,

Asian and commodity-dependent markets will continue to lead, predicts Eoin Treacy of Fullermoney.

We can now divide the performance of stock markets into two groups. On the one hand, we have emerging Asia, commodity-producing Latin America, Australia, and Canada, as well as some technology-focused markets. On the other, we have Europe and the USA. The former are showing relative strength and have the highest degree of separation from the credit/insolvency crisis. The latter are closest to the epicenter of the crisis. Logically, we can look to the first group to show leadership over the coming weeks, months, and years.

In the short term, all stock markets are vulnerable to a pullback for a number of reasons. The six-week rally is beginning to look overextended. Some of the leading shares and commodities are beginning to lose their consistency. Taiwan's key reversal on April 17 is notable in this regard. Israel needs to rally from near current levels if it is to remain consistent. The same can be said for copper and platinum. However, all of these markets have already posted impressive gains and have room to consolidate above their bases.

Markets such as the Dow Jones Industrial Average or the FTSE-100 rallied well over the last six weeks, but only managed to push partly back into their previous ranges. Taking the performance of leading global stock indices into account, we can probably deduce that they are in the bottoming process. However, the case that they have hit their absolute lows is much less clear than for the leading markets.

[...] The Dow Jones World Stock Index has not reverted to its mean in the same way that some of the leading markets have. This supports the lengthy convalescence hypothesis for lagging markets. This index is capitalization-weighted and heavily influenced by US shares, particularly in the oil and banking sectors. Neither of these is currently leading.

The Standard & Poor's 500 index broke downwards again in February and made a new low. On this occasion, the (current) rally has been larger and the index is pressuring the progression of lower highs, so an argument can again be made for a failed downside break. However, it continues to need a sustained push above 880 to reaffirm support from the lows.

[...] The Japanese stock market has been one of the better-performing developed country markets, while still lagging the leaders in the six-week rally. The Nikkei found support above the October lows in November and tested those lows in March, but did not break downwards. The index has rallied well over the last month, but continues to encounter resistance at the top of the range near 9000.

Yen weakness is generally seen as beneficial to the performance of the stock market. The yen peaked in January and has since given up part of its advance. It found at least short-term support two weeks ago and would need to sustain a move below those lows to reaffirm the bearish case.

The Nikkei is likely to sustain an upward break if the global stock market rally continues. However, with the yen finding support, at least in the short term, and the banks' sector underperforming, it may take more time.

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