The question is: is it just a pit-stop or does it seem like the markets and investors are running out of steam? Was it only a bear market rally after all?

End of the bear market in sight
Out of Russell Napier’s ten indicators that historically signalled the end of a bear market, most have now changed to “green for go”. These include the indicator that commodity prices have bottomed out, risk premiums have fallen and bond yields have likewise reached a low. Other factors are active monetary and fiscal policies. However, two particular developments are still missing in this line-up: The “hard” economic facts, such as the level of incoming orders, must catch up with early sentiment indicators. Secondly, the earnings revisions momentum must improve further.

First positive signs in USA
Sentiment indicators such as the purchasing manager indices have indeed acted as a propellant in recent months. The expectation element has run ahead of the actual situation component in this respect, a scenario that is not untypical. First signs that the global economy may have bottomed out have nevertheless emerged. In addition to signs of improvement in the US property market – construction expenditure and the start of new building projects have risen more than expected – de-stocking also seems to be slowly coming to an end. As an example, the level of incoming orders for consumer durables in the US was a positive surprise. These signals now need to stabilise.

Pit-stop or a permanent engine failure?
The question of whether this is only a pit-stop or a permanent engine failure should be resolved in part by the reporting season, which will start off next month with the company reports for the second quarter of 2009. On balance, analyst estimates appear to be dominated by extreme caution, which could now be revised slowly upwards. The most noticeable aspect in this regard is that companies have so far held back with negative advance announcements. As a result, there is a good chance that there will be positive surprises, which should in turn boost the markets.

Scheurer summarizes: "In this scenario, it is worth considering whether the current pit-stop might be used as an opportunity to refuel. Another factor is that investors are sitting on a pile of cash reserves that is waiting to be invested. This gives rise to the expectation that they will take advantage of weak periods."