NEW YORK -- During November we experienced a huge interruption in the rally begun in October. However, the rally in the equity markets around the world and in risk assets in general resumed, as central bank coordination was announced.
Will the rally continue or will a downward spiral start again? Are we perhaps in a broad, extended trading range? This has implications for the financial markets in both the short and long terms and is the subject of this month's commentary.
A Late Halloween in 2011
Normally Halloween, the scariest time of year, comes at the end of October. If we look at the financial markets during the month of November, it appears that Halloween arrived late this year.
The markets experienced minor volatility for the first half of the month. Markets then began to drop quite substantially as the European debt crisis appeared to spiral out of control. The Thanksgiving holiday rally appeared to be turning into a real turkey with a drop of almost 10%.
Central Bank, Intervention
Many pundits were saying that the central banks and the governments were powerless to stop the downward spiral. Bearish sentiment was rising to elevated levels. Then, just as it appeared the markets were going to crash, coordinated central bank intervention was announced.
The Federal Reserve, the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Canada and the Bank of Japan announced "coordinated actions to enhance their capacity to provide liquidity to the global financial system. ...
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points." Separately, the Bank of China eased as well.
After the announcement on November 30, the markets proceeded to rally by almost 5% across the board. The question becomes whether the rally will continue.
Another Parallel to 2007
We have mentioned several similarities between the equity markets of 2011 and 2007:
Both seemed to bottom in the middle of August. There was a fear that the financial world was going to collapse. In 2007, this was due to the implosion of the sub-prime mortgage market. In 2011, it was due to the European financial crisis.
After the bottom occurred in 2007, there was a strong rally that recovered all the lost ground, thus ending the year on a positive note. This seems to be very similar to the rally that we are currently experiencing in 2011. We bottomed in August and have experienced a very robust but volatile rally since then.
Market leadership in the latter part of 2007 was also quite different from earlier in the year. Earlier that year, smaller companies in terms of market capitalization were the leaders in performance.
After the market bottom, it was the larger companies that assumed the market leadership position. Large technology companies were the best performers. This is very similar to our current situation in 2011.
thestreet.com
Will the rally continue or will a downward spiral start again? Are we perhaps in a broad, extended trading range? This has implications for the financial markets in both the short and long terms and is the subject of this month's commentary.
A Late Halloween in 2011
Normally Halloween, the scariest time of year, comes at the end of October. If we look at the financial markets during the month of November, it appears that Halloween arrived late this year.
The markets experienced minor volatility for the first half of the month. Markets then began to drop quite substantially as the European debt crisis appeared to spiral out of control. The Thanksgiving holiday rally appeared to be turning into a real turkey with a drop of almost 10%.
Central Bank, Intervention
Many pundits were saying that the central banks and the governments were powerless to stop the downward spiral. Bearish sentiment was rising to elevated levels. Then, just as it appeared the markets were going to crash, coordinated central bank intervention was announced.
The Federal Reserve, the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Canada and the Bank of Japan announced "coordinated actions to enhance their capacity to provide liquidity to the global financial system. ...
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points." Separately, the Bank of China eased as well.
After the announcement on November 30, the markets proceeded to rally by almost 5% across the board. The question becomes whether the rally will continue.
Another Parallel to 2007
We have mentioned several similarities between the equity markets of 2011 and 2007:
Both seemed to bottom in the middle of August. There was a fear that the financial world was going to collapse. In 2007, this was due to the implosion of the sub-prime mortgage market. In 2011, it was due to the European financial crisis.
After the bottom occurred in 2007, there was a strong rally that recovered all the lost ground, thus ending the year on a positive note. This seems to be very similar to the rally that we are currently experiencing in 2011. We bottomed in August and have experienced a very robust but volatile rally since then.
Market leadership in the latter part of 2007 was also quite different from earlier in the year. Earlier that year, smaller companies in terms of market capitalization were the leaders in performance.
After the market bottom, it was the larger companies that assumed the market leadership position. Large technology companies were the best performers. This is very similar to our current situation in 2011.
thestreet.com
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