"Apparently sentiment at Mar 09 levels....let's hope for another +40% in one year...I doubt that there is one analyst alive predicting this."

David Fuller's view I expressed astonishment during the last two weeks at the extremely bearish reports in my inbox arriving from the USA. Most reflected the general angst but some of the more draconian comments will have come from those who were heavily short and talking their book. This is the opposite of 'pump and dump' which we too often see near the top of bull markets so I will call it 'bear and bait'. Investors may wish to keep this in mind when reading extreme forecasts.

I commented on these reports in my own market summary when discussing the rally potential on Tuesday 6th July, including this remark:


Therefore I think that today's upward dynamics, although not maintained by Wall Street, confirm the onset of at least a sharp technical rally.

Where do we go from here?

Most of the strong rally in previously oversold stock markets represents short covering, as I have mentioned before. The more interesting question concerns whether or not the rally will gain traction. Seasonal factors would normally militate against this but these are not normal conditions. You may recall that a strong rally commenced in July 2009, following the first correction after the rebound from the lows in March of that year. Many people were calling for a retest of the March lows in July 2009.

For today's rally to gain traction before the seasonally stronger period in 4Q 2010, it needs to attract both bargain hunters and momentum buyers. I would not rule this out, as I have said before, because equity valuations are attractive relative to bonds and cash offers little yield.

Meanwhile, a short-term oversold condition looks as if it will soon be replaced by a short-term overbought condition, judging from these Stochastics for the S&P 500, FTSE 100 and DAX. Technically, it would be very encouraging if these and other important indices retained at least half of their still-accruing rally gains during the next pullback, as this would indicate more long buyers than short sellers. I would not rule out this possibility either given some of the oversold readings, including this item from Bloomberg: Pessimism Over U.S. Stocks May Signal Rally, kindly drawn to my attention by colleague Jackson Wong yesterday. Don't miss the two graphs.

Lastly, I have mentioned recently that short covering would cause oversold stock markets to rally more strongly than Fullermoney theme leaders during the initial stages of a rally. However the performance of stock markets which has uncoupled during the last sell-off is extremely encouraging. India's Nifty 50 (weekly & daily) touched a new high for the year today and looks likely to extend this move given the even greater strength of India's Banks Index (weekly & daily). Thailand and The Philippines have also reached new highs for the year in the very firm Asean sector.