Europe Leads US Equities Higher, A Better Week Ahead?

Equities turning higher to start the week after losing 5% last week

The S&P 500 is now 9.7% off the high of the bounce into the 200-day put in just two Monday's ago when China announced plans to slowly appreciate the yuan. For the last two weeks, the equity markets saw non-stop selling as the Dow dropped over 900 points and ended last week well below the 10,000 level.

After making news lows late last night, US equity futures are now trading up over 1% as Tokyo reversed higher to close up 0.8% after opening down 1.7%. European markets all mounted hefty bounces with London up 2.5%, Germany up 2.5%, France up 3.3% and Spain up 3.5%. Perhaps the tide has turned and we can expect a stronger tape this week.

Barron's analyst Mike Santoli has outlined the market's current predicament quite well:

The current market argument pits the charts against the cheap, the increasingly worried tape readers who see an enduring downtrend emerging versus the spread-sheet studiers who spy increasing value with every percent decline in the Dow, and contend that stocks are over-anticipating a recession relapse.

As always, traders in the short-term must respect the tape and not fight the momentum. But, markets never move in straight lines and short-covering rallies are typically fast and furious in bear tapes. With many Dow components yielding more than the 10-year Treasury and 2nd quarter earnings reports beginning next week, we could see value hunters emerge.

Equities Rally as Employment Rate Stabilizes

Last week's job report showed a stabilization in the unemployment rate at 9.7%. The rate is just 0.4% lower than the recession highs of 10.1%. Yet, the stabilization of the unemployment has allowed for a dramatic rise in US equity prices. The graph below shows the employment rate (1 - unemployment rate) versus the Standard & Poor's 500. The chart below is a great lesson for understanding how much of a future discounting mechanism the stock market is. Stocks are up nearly 75% from the lows in a continuing rally that began as the unemployment was still rising.

It is interesting to note how few bullish voices there were at the bottom yet the market was able to discount improving economic conditions. With the Dow back to 11,000 and back over pre-Lehman Brothers levels, I would expect to see real improvement in the economic backdrop for substantially more upside to be attained in equity markets. This part of the rally was seemingly fueled by a movement from "horrible" to "bad", an end to the deteriorating economic landscape. I would be surprised if we don't see further job gains in the coming months.