In the last two weeks, the S&P is up about 8%, closing last week at 1100, the midpoint of our 1000-1220 'decision box'. This has coincided with the reporting of second-quarter earnings where, once again, companies re showing their ability to drive up profit margins in a difficult economic environment (see Weekly Chart). We believe the bottom of the decision box will hold because the US will not experience an earnings downturn in 2011. That said, we are acutely aware of the risks to world growth from deleveraging and the possibility that policy mistakes could extinguish fragile recoveries. Thus, as risk managers, we have been concerned by the clear downturn in the intermediate trend (the 50-day moving average) of stock prices, the flattening out of the primary trend (200-day moving average), and the clear downturn in Treasury bond yields. We have therefore adopted a slightly defensive position in our portfolios since the markets seem to be telling us that our optimism is misplaced.

David Fuller's view This is a cautiously optimistic view, which makes it much more bullish than most of the commentary that I have received from the USA recently. I think they are right to be more optimistic then their brethren, given the technical evidence which has improved considerably in just over three weeks.

For decades I have maintained that in the short to medium term, stock markets are all about sentiment and liquidity. Recently, we have had liquidity in abundance with exceptionally low interest rates, Bernanke ready to provide an additional stimulus if necessary and plenty of cashed-up investors. However sentiment has been diabolical and Fullermoney regards this as a contrary indicator.

As Rod Smith and Co point out above, the leading emerging (I prefer progressing) markets have resumed their uptrends - from Colombia to Thailand - two countries which could also be described as having a few economic and political problems. Most western markets have been rangebound but they recently moved up from the lower side of those patterns, as we can see from the S&P. Some, such as Germany, are stronger. This evidence shows that sentiment is positive in most of the progressing world, and bouncing back from a bearish extreme in the West.

However for the most telling evidence of an improvement in sentiment look at this year's havens. The US dollar offered nothing more than liquidity and support for it has melted away against strong currencies such as the Singapore dollar (USD/SGD). The US Dollar Index is heavily weighted by the euro and sterling but that has not prevented it from falling for eight consecutive weeks recently. Gold (weekly & daily), which had too bullish a consensus for my comfort last month has fallen despite the weakening US dollar. Fear of deflation in the West has persisted despite all the money printing. Consequently 10-year Treasury Bond yields (weekly & daily) have been pushed to absurdly low levels for any other economic environment and last week's downward break has not been maintained. Two other popular havens in recent months - the Swiss franc and yen - also appear to have peaked: CHF/EUR and JPY/EUR.

Returning to stock markets, we cannot rule out the possibility of some further ranging during the next several weeks, not least as recent gains are consolidated. However sentiment is no longer standing on the window ledge. Rallies from the early-July lows bode well for 4Q 2010.