By Greg Peel

The Dow closed up 208 points or 2% while the S&P gained 2.2% to 1125 and the Nasdaq added 1.8%.

Technical analysts are having a field day at the moment. Last week the S&P 500 regained the 200-day moving average at 1114 having already conquered the 50-day but slipped back again to mount another assault. That assault came last night when the S&P not only re-took the 200-day but at 1125 closed just shy of the 100-day moving average at 1126, having briefly traded above just before the death.

There is one school of traders suggesting that if the S&P can hold above the 200 they will be buyers, and now they're saying if it can move above the 100 they'll be buyers. The way things are progressing, it looks like the buyers are winning at present. But it's times like these when the sellers just wait patiently.

Readers may recall that we spent a lot of early 2009 suggesting that “less bad” was the new “good” before we moved on to become obsessed with “green shoots”. Well those green shoots went on to bloom into reasonably healthy flowers until they were attacked by the Greece mite. Then China began a defoliation program, and finally US garden beds began to wither. The fear was we may end up with barren soil once more.

The US second quarter GDP reading was enough to send the Dow tumbling initially on Friday but a solid read from the Chicago PMI turned that around. The anticipation was that perhaps the Chicago number would mean a not so bad national manufacturing PMI release. There was also a fear the Chinese PMI would dip into contraction, which would psychologically be enough to spook the market once more. And that's where we were ahead of Monday's trade across the globe.

The official Chinese manufacturing PMI, released on Sunday, showed a fall only to 51.2 from 52.1 which meant slower expansion – just as Beijing has intended – but not contraction. Both Australia yesterday and Wall Street last night took this on as a positive, despite the independent HSBC calculation for the Chinese PMI slipping into contraction territory at 49.4.

If the Australian market stumbled, it was only for a moment. The local PMI came out at 54.4, up from 52.9 in June. We all know that mining's in a sweet spot, but grave fears have been held for the rest of the economy.

The UK followed with a dip from 57.6 to 57.3, which was not as bad as expected. And then the eurozone surprised with a rise from 55.6 to 56.7 when Europe's meant to be the one region in the most trouble. It just goes to show what a lower currency can achieve.

So it was all up to the US and sure enough – the number was less bad than thought. July's PMI fell to 55.5 from 56.2 but economists had expected 55.0. And to top things off, economists had expected June US construction spending to fall 0.5% after a 1.0% fall in May but instead it rose 0.1%, albeit boosted by government programs.

It was the third consecutive drop in the US PMI, but the number is still above 50, indicating expansion. It is thus “less bad” than the pessimists have been suggesting. If you ignore HSBC, the Chinese number was also “less bad” than might have been. And Europe? Why are we even worried about Europe?

Indeed, China and Europe had the Dow up 150 points from the bell last night before the US PMI was even released. Aside from the eurozone PMI, major British bank HSBC and France's largest bank BNP Paribas both reported much better than expected quarterly earnings. That was enough to reignite risk-taking, and the US PMI just added another 50 points. “Less bad” is “good” again.

While this may be all very exciting, the fact remains there's not a lot of conviction. Volumes in the US were tepid at best. It was the first day of the month, which is a day when funds make their fresh allocations. Fund managers were then caught in the vacuum that is short-term trading, not long-term investing.

The same was true for base metals in London. While most of the “real” metal market is closed for the summer, commodity funds were making fresh allocations last night and short-term supply squeezes have been sending metal price through technical levels as well. More technical levels were breached last night, sending copper, aluminium, nickel and zinc up 3-4% and lead up 7%.

Of course, such surges in metal prices adds fuel to the stock market via the materials sector. BHP ((BHP)) and Rio ((RIO)) shares jumped 4-5% in London and New York trading.

And oil was not left behind. PMI mania sent oil up 3% or US$2.39 to US$81.34/bbl to its highest level in three months. A breach of the US$80 is also enough to make everyone psychologically excited again. And the oil price spurred on oil stocks.

While it may have been all fun and games in the risk assets of stocks and commodities, there were reality checks elsewhere. Bond yields did rise, but the benchmark ten-year remains below the psychological level of 3% at 2.97%. But what had commentators shaking their heads was a US$1.5bn issue of three-year bonds from Dow component IBM.

The IBM issue was priced, and put away, at a mere 30 basis points over the equivalent Treasury, or 1.14%. This means investors are happy to tie up their money for three years for the miserly return of only 1% when IBM stock is paying a dividend yield of 2%, and management recently suggested the dividend payout would rise. Why take 1% over 2%? because if you buy the bond there is a very good chance you'll get your money back after three years. If you buy the stock, you might get 2% but where will the stock price be?

Clearly investors are not prepared to take the risk the stock price will be higher, even in three year's time. It is that prevailing attitude that has ensured the 2009 stock market rally was no more than a correction from an oversold position. Until true investors, and not just traders, are ready to dive back in, Wall Street is not going anywhere spectacular in a hurry. These things take time. My call for 2010 was sideways. The S&P 500 re-took the 200-day at 1114 last night. The S&P closed at 1115 on December 31, 2009.

The VIX volatility index last night fell to 22.

Over in currency markets, a strong PMI and solid European bank results had the euro on the fly again, sending the US dollar index down 0.9% to 80.89. The Aussie risk indicator naturally flew too, up a cent to US$0.9139. But gold went nowhere despite the US dollar drop, closing up US60c at US$1182.00/oz.

The SPI Overnight jumped 64 points or 1.4%.

The ASX 200 re-took 4500 again yesterday, but the ASX 200 closed last year at 4870, so the local index is undeperforming the US index by about 7.5%.

Today in Australia sees building approvals, retail sales, and the RBA (non) decision. Tonight in the US sees factory orders, pending home sales, vehicle sales, and income and expenditure. Dow Chemical, Mastercard, Pfizer (Dow) and Procter & Gamble (Dow) will release results.

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