By Greg Peel

The Dow closed up 57 points or 0.6% while the S&P gained 0.5% to 1028 and the Nasdaq managed only 0.1%.

I suggested yesterday that the air of defeatism prevailing in both the US and Australian markets – one in which investors simply seem resigned to the fact the market was going lower – brought back distinct memories of late February/early March 2009. At that time the market was not crashing, it just kept slipping lower every day. For the technicians, the relative strength index (RSI) on the S&P 500 hit 15 at that point when a reading of 30 is considered a typical low point (a nod to CNBC research here).

The lowest the RSI has reached is 5 – just before the turn out of the 2002 recession. Currently, it is 10. That means there's less relative strength in the market now than there was before the turn last March. Traders take this as an indication the market is simply oversold.

There was much talk in Wall Street overnight of RBA chairman Glenn Stevens' summation yesterday of the current state of the global market. He noted:

“The global economy has continued to expand over recent months, consistent with a trend pace of growth. The expansion remains uneven, with the major advanced countries recording only modest growth overall, but growth in Asia and Latin America, to date, very strong. There are indications that growth in China is now starting to moderate to a more sustainable rate. In Europe, while output in some key countries has been improving recently, prospects for next year are more uncertain given the budgetary constraints governments face and the pressure on euro area banks. US growth has looked stronger in the first half of 2010 but the pace of labour market improvement is slow.”

In other words, the RBA's view is global growth is currently uneven but not uniformly weak. It was considered offshore as an “upbeat” assessment. Further evidence was provided earlier yesterday with the release of a near record May trade balance for Australia and a big upgrade to the April number driven, as usual, by bulk commodity volumes and prices. This information, and view, were not lost on Wall Street. And yesterday the Australian market finally broke its lengthy losing streak.

The turnaround was supported by, but not sparked by, either the trade balance result or the RBA statement. Rather the market just reached that point where the value-seeking buyers said “enough”. Another morning dip morphed into a steady rally to the close. Asia followed suit, and Europe kicked on with gains of 2-3% in London, Germany and France. It was now up to Wall Street to break a similar losing streak.

And Wall Street didn't disappoint, with the Dow up 171 points just over half an hour into the session. But then, two things happened.

Firstly, the June ISM index for the US services sector (80% of US output) registered 53.8 – down from 55.4 in May, below expectations of 54.5, and the lowest reading since February. It was yet another sign of slowing in the pace of US growth albeit, as was the case with the equivalent manufacturing index, still an expansionary figure.

Secondly, the S&P 500 had reached 1042. As we recall, the big technical level on the way down recently was 1040. The breach of this support level brought a lot of bears out of their caves. Support has thus now become resistance, and there are plenty of traders who believe this market must go lower still and are ready to sell into any rally. And they did.

At 2pm the Dow was back to square. By 4pm it looked like it was headed into negative territory once more. But just as there was a late down-kick on Wall Street on Friday night, there was a similar up-kick on the death last night.

Talk from brokers around the Australian market is that there is a similar intention from clients at present, being sell into any rally. While it looked like the world was trying to mark a bottom last night and yesterday, Wall Street's failure to go on with disappointed the bulls. Even the bulls suggest that perhaps the S&P has to dip under 1000 before value buyers can enter with more confidence. Right now it seems we have value buyers trying hard but technical and unconvinced sellers fighting back.

The euro gained some strength once again last night, sending the US dollar index down half a point to 84.04. The Aussie saw a delayed response to yesterday's data, and since Friday has now jumped 1.4 cents to US$0.8533.

Adding to the bulls' disappointment on Wall Street last night, and another reason why the rally failed, was activity in the US bond market. A turnaround in stocks should be accompanied by a matching reversal of bond buying (an upturn in yields). This did not happen, and indeed the benchmark ten-year bond yield closed down 4 basis points to 2.94%. While investors continue to seek bond yield over capital return on stocks, the market cannot rally.

But funnily enough, things seem brighter in Europe than they are in the US. The rally in the euro to US$1.2625 was matched by another drop in gold, of US$14.80 to US$1194.10/oz. While not good news for gold stocks, the moves indicate concerns over a devastating European crisis are beginning to abate. This is being supported by the current round of European bank “stress tests”, which are proving not as scary as many had feared.

All this added up to support for base metals in London, which put in gains of 1-2%. Oil nevertheless slipped slightly, by US16c to US$71.98/bbl.

The SPI Overnight gained 11 points or 0.3% on top of yesterday's turnaround.

So we seemed to have reached a point which one might compare to slack water at the bottom of a tide. Either we still have further to ebb before the low-tide mark is reached, perhaps at some level between 950-1000 in the S&P 500, or perhaps we are seeing the first trickle of the flood tide. There are still plenty of doom and gloom bears out there who believe we're heading back to the previous lows of March last year, but even those bulls seeing the market as now well oversold are conceding maybe we just have to become a little more oversold just yet.

Or the S&P 500 might close above 1040 shortly, and the rally would be on. At least in the short term.

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