Europe Economy

Despite Big Rally, Charts Remain Weak: Analyst


Following big gains for stocks on the first day of the month some are already banking on a strong end to the year for the market. But one analyst expects that one-day gains will just lead to more of the same.

“Even though we can never exclude that this positive first step will lead to a better equity market environment, we remain skeptical for a number of reasons” Philippe Gijsels, the head of global market research at BNP Paribas Fortis, said in an e-mail to CNBC Thursday.

“First of all, first days of the month are typically strong, around 70 percent of the time," Gijsels said. "On top of this, the weak leading to the Labor Day weekend typically has a positive seasonality, (while) the rest of the month clearly does not."

“Second, equity markets were clearly oversold and looking for an excuse to rally," he said. "The most important economic figure of the day, the ISM, was exceptionally strong. However, quite a bit of negative economic news was neglected.” 

“The ADP employment figure and construction both disappointed. US car sales fell to the lowest level in 27 years.”

“Thirdly, the technical picture remains weak," he said. "The damage done to the charts over the last couple of weeks is quite substantial.”

A one-day spike like Wednesday is a good way to start a rally, but thinks the follow through is the real key to a lasting turn, he said.

QE2 Delayed?

Gijsels said the Federal Reserve minutes on Monday afternoon went under the radar. 

“The Fed moved quite a bit further away from quantitative easing (part two)," he said. "The idea in the market that was gaining more and more traction was that if economic figures this week were sufficiently bad, Ben Bernanke would be able to convince the other Fed members to start the second round of quantitative easing, possibly already on the next FOMC meeting on September 21.”

“And it is clear that the market liked this idea very much as it supported equities on numerous occasions," he said. "With this ISM figure the prospect of QE II has at the very least been postponed.”

“Yesterday we had comments by a number of Fed members, all coming in on the hawkish side," he added. Dallas Fed President Richard Fisher "suggested that the Fed runs the risk of 'pushing the string.'"

Philadelphia Fed President Charles Plosser "argued that the Fed should only add to its excess reserves if there was the need to fight deflation, but that QE should not be implemented if unemployment was the problem. (And Fed Governor Donald) Kohn added that reinvesting would not automatically mean further easing.”

“For the market this means that the high level of uncertainty regarding the state of the economy remains and prospect of quantitative easing will lend less support," Gijsels said. "So expect volatility to continue and risky assets to remain under pressure for at least the next couple of months. It is quite possible that we will have a September to remember, although not necessarily for its first trading day.”