Risk assets have had a good early start to 2012; the S&P 500 is up 5% year to date, while long-term US Treasuries are down 2%. We think this could continue for another week or two. Investor pessimism is receding, but has not yet been replaced by excessive optimism, which has tended to be the best environment for stocks according to Ned Davis Research's weekly Crowd Sentiment Poll. We expect that the S&P 500 will encounter technical resistance around 1360, its 2011 high, as optimism becomes excessive.

David Fuller's view This issue of The Weekly View was released on Monday so markets have seen another week of mostly gains, further improving this year's performance to date. The technical action this January has been exemplary, and not just on Wall Street. It represents a continuation of the recovery which commenced at the beginning of 4Q 2011, following a period of support building near the August to early-October lows.

Since this particular phase of the global stock market recovery commenced in mid-December, many trends are becoming temporarily overstretched leaving them susceptible to a reaction and consolidation before long, albeit within what looks increasingly like a cyclical bull trend, fuelled by accommodative monetary policy and at least a temporary easing of Eurozone concerns.

What many of us find disconcerting, although we are learning to live with it, is the unprecedentedly high levels of correlation seen in recent years, causing most stock markets, commodities and even gold - all of which are usually described as 'risk assets' - to move up and down more or less simultaneously. Similarly, the USD strengthens as a 'risk off' trade and weakens in response to a 'risk on' trade for stock markets and commodities. Government bond futures are rangebound, moving to the higher side of these patterns as a 'risk off' trade, and avoiding so far a larger sell-off when stock markets rally, thanks to Fed, BoE and ECB support buying as their versions of quantitative easing continue.

The main cause of the unprecedentedly high levels of correlation, Fullermoney maintains, is high frequency algorithmic trading. We do not like HFT, as you know, because it is predatory, usually reducing market liquidity when it is most needed, while increasing volatility and causing periodic meltdowns which are followed by somewhat slower but persistent melt-ups. This undermines most policies of prudent portfolio diversification.

HFT will not prevent cyclical and secular bull and bear trends from occurring. Currently, breaks beneath the mid-December reaction lows for major stock market indices remain necessary to question Fullermoney's cyclical bull hypothesis. With the next reaction and consolidation within this medium-term uptrend likely to commence in coming weeks, watch for a probable downside lead by bank indices including the S&P 500 Banks Index (weekly & daily) and the Euro STOXX Bank Index (weekly & daily), followed by eventual downward dynamics for some of the more widely followed stock market indices.