Global Stocks: Climbing a Wall of Worry   

• The recovery in global stocks from the US market lows in March is reaching a delicate juncture. Those investors who were "in" near the March lows are now sitting on returns of around 30% for the S&P 500, and massive returns of nearly 90% for the KBW Bank Index.
• Cries of "bear market trap" are sounding more hollow by the day, even though everyone readily admits that we are still a long ways away from recovery in the global and major economies. For deeply oversold sectors like the banks, the rally is being driven mainly by short-covering, but for sectors like technology, there is something more mainly economic recovery expectations.
• The stock price movement of late is in direct contrast to increasingly bearish estimates by international agencies like the IMF, who again slashed their forecast for world economic and trade growth, and also substantially raised their forecasts of total banking losses to over $4 trillion.
• Despite almost universal bearishness about Japan’s both cyclical and secular economic prospects, the Nikkei 225 continues to set up for a golden cross between its 13- and 26-week moving averages, while economically sensitive sectors like automobiles, steel, non-ferrous metals, machinery and even shipping are leading the rally on expectations of a recovery in the global economy, while investors continue to dump transportation, warehousing, communications, foods and retail, i.e., domestic demand-related stocks.
• Because stock prices have not yet climbed back above their 200-day moving averages nor have we seen a "golden cross" between the 200-day and 50-day moving averages, the "all clear" signal that the bear market is really over hasn't been seen yet. Thus some form of retest of prior lows is inevitable.
• However, given the evidence of big institutional money again flowing into stocks and the resilience of stocks to the ongoing flow of generally bad news, we suspect that stocks prices in the US and Japan will continue to climb a wall of worry meaning investors should adopt a "buy on weakness" instead of a "sell on strength" stance toward equities.

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