Friday, May 8, 2009

>Market Analysis Comment (Merrill Lynch)

Breakouts are global

Equity market recovery is global
The breadth of rally from the March lows has improved as more indexes across the globe participate in the market recovery (side bar). Many of these indexes show short to intermediate -term bases. The MSCI Emerging Markets Index, Brazil, China, Korea, India, and Malaysia have breakouts from these bases and represent leadership for this rally. Australia, Hong Kong, Japan, Mexico, Russia, and Singapore are positioning for upside breakouts from these bases. While Europe is showing signs of bottoming, the major equity averages in this region are lagging many of those in the rest of the world.

What about the US?
The US has seen a strong recovery confirmed by market breadth, accumulation (rather than just short covering), and strong intermediate-term momentum readings. The NASDAQ is leading with a breakout from a short to intermediate term base, while the S&P 500 and DJIA remain below their early January highs. Year-to-date, the NASDAQ is up 9.0% while the S&P 500 and DJIA are down
2.9% and 6.4%, respectively. Importantly, the stocks versus bonds ratio broke to the upside now favoring stocks (see page 4). The sectors showing leadership are technology, materials, and consumer discretionary – these sectors also show the strongest bases off the November and March lows.

Levels to watch – potential to higher resistance levels
We maintain that within the rally from the March low, pullbacks or consolidations are likely to remain modest. While the S&P 500 continues to challenge the 880 area as resistance, the index has buy signals on both the daily and weekly point and figure charts. These signals project into higher levels of resistance. The daily signal counts to 935 and the weekly to 1000, which coincides with our 915-965 resistance as well as the lower end of the post-October low range highs in the 1000-1050 area. We maintain that a 50% retracement of the downtrend from May 08 to Mar 09 is highly possible and targets 1050-1055. Key support is now 845- 825, which is above our 715-780 support area.

Up April = positive bias for May
The S&P 500 was up 9.4% in April, which was the fourth best showing for April. Only April 1933 (33.9%), 1939 (15.1%), and 1935 (9.8%) showed higher returns for the month. Since 1928, a positive April for the S&P 500 has preceded an average gain of 0.53% for May (vs. an average loss of -0.02%). This also exceeds the average loss of -0.88% in May that follows a negative April. In summary, an up April has a tendency to neutralize a negative seasonal bias in May. This implies that the market rally can continue.

To see full report: MARKET ANALYSIS