It's a bear-market rally, says Saxo

Despite the current oft mention of "green shoots" appearing in the flagging economies around the world, investment strategists at Saxo Capital Markets are quick to remind investors that there are still widespread patches of "brown grasslands" in the global economic landscape.

The risk of an outbreak of "wild brush fires", reminiscent of the market meltdown last year, however, has certainly been lowered.

"A lot of the recent uptick in the markets is based more on hope than strong fundamentals," observes Christoffer Moltke-Leth, Saxo's Head of Sales Trading for Asia-Pacific.

"There are still several overriding concerns that we should be mindful of, such as unemployment numbers in the US and other developed economies; housing numbers in the US and the UK; and the build-up of debt, owing to expansive government fiscal policies."

These factors can still put dampeners on consumer spending and confidence before any concerted and sustained recovery can take place, he warns.

"We would need, for example, growth in the US to be at 2% to 2.5% to keep jobless numbers unchanged. There is still a backlog of 9.8 months in US housing inventories. We need to see that figure come down to less than five months for some signs of stabilisation, hence more confidence, in consumption," adds Moltke-Leth.

In addition, he reckons that while the surprising rise in foreign asset investment (FAI) in China and the prospects of a more deregulated and open economic landscape in India following the victory of the Congress Party are positive signs for the global economy, there has already been an element of "de-globalisation", owing to the winds being sucked out of international trade.

"Many economies have been forced to look inward and there is always the spectre of protectionism or a focus on domestic markets," says Moltke-Leth, who believes the markets might still backtrack 15% to 20% in the coming months. "We may end up higher. But it is more likely that markets will be lower by year-end."

He favours US Treasuries and bonds, which he believes will outperform equities over the next three to six months, owing to the robust support of the US Federal Reserve.

Andrew Robinson, a market strategist at Saxo, offers similar views. He says: "Saxo's view is that we are in the midst of a bear rally primarily because of the speed in which the rally has taken place, which is typical."

Says Robinson: "Technically, we will need to see the Standard & Poor's 500 reaching 1,050 before the next leg of the rally can take place, which is unlikely, as we are likely to encounter resistance because of profit-taking along the way up. I think we are more likely to see attempts to consolidate at 1,000 until fundamentals catch up, which may not happen till mid-2010."

Robinson is also cautious on the exuberant commodities front, pointing out that most of the recent run-up in base metals has been due to stockpiling by consumer countries like China taking advantage of the depressed prices.

"Once the stockpiling comes to a halt, you are not likely to see any further build-up on those fronts," warns Robinson, adding that there is now a slight over-bullishness on the price of oil at US$60 per barrel.

He reckons that any further rise in demand is unlikely to be sustained until global trade and economic activities pick up. As a result, the price of oil could slip back to the US$45 to US$50 support levels.

His view is that the euro is likely to stay weak because of the possibilities of more economic deterioration in the Eurozone as a result of the European Central Bank's lagging behind in the lowering of interest rates.

Given such scenarios and still-wide trading ranges, both Moltke-Leth and Robinson advise foreign exchange traders on the Saxo platform to stick to shorter-term strategies.

On the equities front, Saxo is still sticking to defensive plays like pharmaceuticals and utilities as well as a shift into consumer staples, while staying away from stocks in the aviation and automotive sectors. Gold may be a good hedge against stock market correction and weakness in the US dollar, says Moltke-Leth.

Those who like to hold on to blue chips may also want to hedge their positions against any market declines in the near term through a variety of options offered by the SaxoWebTrader and SaxoTrader platforms, such as contracts for difference (CFD), exchange-traded funds (ETFs), and futures.

"The best strategy is to try to spread your risks across multi-asset classes so that you can withstand mood swings in the markets," Moltke-Leth recommends. "But, most importantly, have an exit strategy. Do not lose sight of your investment objectives and stick to them.

Robinson says having discipline is important to be a successful online trader. "Never get too 'married' to a particular view or strategy and be prepared to listen to 'advice' from the market. You can always keep your ammunition to fight another day."

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