Green Light for London, Limbo for Tokyo

04/11/2011 2:07 pm EST

Focus: GLOBAL

Deborah Owen

Columnist, The IRS Report

As UK stocks follow the resilient US market higher, Japan’s Nikkei has yet to clear a key resistance level, writes Deborah Owen in The IRS Report.

  • A 9.0 earthquake.
  • A tsunami.
  • The brink of a nuclear meltdown.
  • The collapse of a number of regimes in North Africa.
  • The imposition of a no-fly zone over an oil-producing country.
  • And the Portuguese government's failure to push through a package of austerity measures.

Any one of these events could have sent the market into a prolonged tailspin—if they had occurred at a time when sentiment was fragile.

Instead, both the US and UK markets have climbed back to their levels before the earthquake hit Japan. The most notable feature of the markets in recent weeks has been their resilience.

There are still plenty of potential negatives around. A big one is that the US housing market shows no signs of bottoming out. [See today’s Michael Shulman excerpt for more on that—Editor.] Four out of ten homes sold are being put on the market by people who cannot meet their mortgage payments or because the property has fallen into negative equity.

There is also concern about who will buy US bonds once the Fed stops doing so in June. But as the adage goes—a bull market climbs a wall of worries.

Looking at the charts, one of the encouraging factors is how quickly stock markets bounced back after the initial news of the earthquake and tsunami were digested. The S&P 500 has punched through resistance at 1,300.

Back in February when it was at this point, I noted that the indicators were overbought and there needed to be some consolidation. This has now happened, and the bulls look set to push higher, with 1,380 the immediate target.

But it would be a mistake to become too complacent. Quantitative easing has been an important driving force, and investors may decide to take profits ahead of June, when QE2 comes to an end. A move below support at 1,220 would rule off the long-term uptrend.

chart
Click to Enlarge

London’s FTSE 100 index (see chart above) has been underperforming the US market, but it has rallied smartly off its 200-day moving average, suggesting that the long-term uptrend remains intact.

The mining and engineering stocks continue to make the running, while the banking sector (which has an almost equal weighting to the miners in the FTSE 100) continues to underperform.

Now that the FTSE has cleared overhead resistance between 5,900 and 6,000, the target is 6,400. The major support level on this chart is 5,600. [The index reached 6,062 Monday—Editor.]

As for Japan, natural disasters are what Austrian economist Joseph Schumpeter described as "external" events that cannot be predicted by looking at the charts.

The sharp falls in the Japanese stock market on the two days following the earthquake and tsunami broke the pattern of rising highs and lows. It also took the Nikkei-225 index below its long-term moving average. The 9,000 level was a major support level and these often prove to be areas of resistance on a rebound.

The fact that the Nikkei has broken back above 9,000 indicates good buying momentum—but we need to see it climb back above the 200-day moving average, currently at 9,850, to reinstate a positive bias to the chart. [The Nikkei has recently stalled just shy of that level at approximately 9,700—Editor.]

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