Not Bad for a Mere “Smoke and Mirrors” Rally    

• As we admonished in our May 4, 2009 TJI ("Don’t Sell in May and Don't Go Away"), 2009 is not a year where the traditional patterns apply. The market even managed to keep its positive momentum through the one-year anniversary of the crisis and the traditional October jitters to remake Dow 10,000. 
• Two weeks ago, we also succumbed to short-term doubts about the sustainability of the rally, and the fact that the NYSE Euronext online store was ready for Dow 10,000 with "Dow 10,000 2.0" baseball caps smells of over-enthusiasm. However, we remain encouraged by the still-large group of market pros who see this rally as nothing but "smoke and mirrors", as they are the "wall of worry" that stock prices continue to climb. 
• While we still see potential for an interim "box market" trading range developing after 1,200 is hit on the S&P 500, more bearish scenarios for new market lows or a tick-for-tick tracking of the Heisei Malaise bear market in Japan are looking less likely. Basically, global equity markets continue to discount economic recovery, while extraordinary easing by the monetary authorities and fiscal largesse by national treasuries continue to provide the excess liquidity that is driving stock prices.
• While the S&P 500 has surged some 60% now from March lows, it has come on the back of a weak USD, meaning investors willing to assume more risk in these uncertain times by investing in non-Japan Asia and emerging markets are enjoying not only better capital gains, but currency gains as well.
• Unfortunately, Japanese stocks are not looking so attractive in this environment, hobbled as they are by continued strength in the yen and severely recessed domestic demand. In terms of particular sectors, however, we see growing potential for a trend reversal (rally) in the banks and shipping companies in particular. Japan's banks have sold off since August while US major banks were surging to new highs. Over the longer term, Japanese banks have tracked the US KBW index fairly closely. Shippers have lagged because of the erratic movement in the BDI (Baltic Dry Index). This index however continues to maintain a positive bias that has not been discounted yet in Japanese shipper stocks.

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