Google+ Followers

Sunday, 11 January 2009

Signs of life despite appalling data

Global markets had to absorb a raft of appalling economic data this week, capped on Friday by a large jump in US job losses for December.

But, countering this, there were also signs of life in the credit and money markets. Short-term money rates continued falling, while corporate bond issuance from good companies jumped, although investors demanded a hefty risk premium.

After a brutal 2008, investors sought silver linings in the first full trading week of the new year.

Long view: Signposts on the road to rock bottom

A year ago, anyone who had studied financial history should have been prepared for trouble, even if history had few precedents for the disaster that ensued.

Now, the precedents are ambiguous. Some indicators that flashed trouble before the crisis now suggest it could even be time to buy. Others are contradictory. Even so, history may be our guide, so it is worth looking at the precedents.

There are two broad ways to gauge the market’s future from the past. One focuses on valuations or the fundamentals – metrics that have showed that stocks are particularly over or undervalued over time. The other focuses on price patterns, known as chartism or technical analysis.