David Morris
WITH the days getting longer and the Cheltenham Festival kicking off this afternoon, there is a palpable feeling of optimism around. Despite little in the way of bullish news last week, stock indices puffed and wheezed their way higher. The S&P made its highest close in 17 months – breaking back above 1,150, which was the high it made back at the beginning of this year.
Although the index then slumped 9 per cent in little more than two weeks, it has clawed back those losses over the past month, and Friday’s retail sales numbers were strong enough to help justify the week’s gains. This now marks the high point of the rally off of the March 2009 lows following the unravelling of our financial markets.

Although serious problems remain unresolved, investors consider these as issues for another day. In the US, unemployment is still rising, residential and commercial property markets look precarious and the budget deficit continues to soar. Yet the abundance of cheap credit available to Wall Street banks means that bond and equity markets remain supported. Even the imminent withdrawal of the Fed’s $1.25 trillion support for mortgage-backed securities seems of no concern to the majority of investors, and once again the bulls are back in control.

Of course, the higher the market goes, the less sustainable it appears to be. Yet there are frequently periods when markets are carried along by momentum and moves become self-fulfilling. Financial markets are, more than ever before, technically traded. I’m not saying that they are completely removed from fundamentals – after all, government stimulus and bail-out packages are still fundamental – just that they are unsustainable.

In the S&P 500 index, the 1,150 level marks the high point before the sell-off in January. A failure here would suggest the formation of a double-top. To the downside, 1,120 marks the 50 per cent retracement of the move from the October 2007 high to the March 2009 low. On the upside, 1,170 marks the 50 per cent retracement of the move from the March 2003 low to the October 2007 high. Professional traders are watching these levels, so we should be too.