The reflation rally continues. We have followed Chris Cadbury for many years and have found him to be one of the most reliable analysts of the US stock market. Cadbury was ranked number in the US for the period 2001 to 2005 and number two for the period 2001 to 2008 by Timer Digest.

Cadbury turned very bullish on the U.S. stock market on 8 July when the S&P 500 dropped to 871 – two points above the nearly three-month low at 869. Since then, through yesterday, he has gained 109 S&P 500 points. Most importantly, Cadbury’s data remains bullish.

A couple of weeks ago the value for the Trendline Oscillator climbed to +10.6. During the past 40 years, ultra-high readings or series of readings of +10 per cent or more have occurred only nine times.

The ultra-high readings have been bullish for the stock market over the intermediate term denoting great underlying momentum. The S&P 500 has always been higher one, two and three months later, according to Rainsford Yang. One month after the first reading the S&P 500 had advanced from 1.1 per cent to 8.1 per cent, with a median gain of 4.6 per cent; two months later, it had risen from 1.3 per cent to 17.2 per cent, with a median gain of 7.2 per cent and three months later, it had climbed 1/1 per cent to 15.5 per cent, with a median gain of 10.7 per cent. The pullback after the first reading was never more than 2.5 per cent on a closing basis. Additionally, the McClellan Oscillator values have been very high recently, +230 on Thursday week ago, +223 Friday week ago and +220 on Monday week ago. In bull markets, McClellan Oscillator readings of +165 or more also indicate impressive underlying strength in the stock market that will carry the market higher.

Tim Bond, head of Global Asset Allocation at Barclays Capital, is an original thinker with a contrarian bent. One of his recent publications discusses the amazing bearishness still prevalent. We quote as follows:

“Never has a bull market climbed a steeper wall of worry. Despite a proliferation of positive economic indicators, the consensus remains resolutely gloomy. Bullish economists are still rarer than hen’s teeth. The average forecast for Q3 U.S. GDP growth is an anaemic 0.8 per cent increase, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real U.S. growth rate in the first two quarter of recovery is 7.1 per cent.”

Bond notes that the Asian recovery has been deeply questioned by Western analysts, who do not believe the region is capable of intrinsic growth. Bond writes that 2009 will be the second year in a row where the increase in Chinese domestic demand equals or exceeds that of the US. He also dismisses the widely-held belief that China is a prisoner of US consumption. The US is currently absorbing only 17 per cent to 18 per cent of Chinese exports – while over 50 per cent are going to Asia and the Middle East.

It is Bond’s belief that business made an enormous error of over pessimism in this downturn, cutting much more sharply than was necessary.

“The simple underlying story is that businesses, like the markets, panicked after Lehman went under. Employment and output were both reduced far more than turned out to be necessary, as businesses temporarily and understandably assumed a worst-case scenario. The essential point is that the vicious contraction from Q4 2008 to Q2 2009 is symptomatic of a very large forecasting error by business managements, who assumed-incorrectly as it turned out-that demand would fall much harder and faster than actually occurred.

"Last week, the commentary accompanying the HP result in the US noted that it had been an issue for them to be able to provide adequate supply of some of their products as they were caught off guard by the jump in demand that was ahead of expectations.

"Another sign that supply destruction has exceeded demand destruction.

"So, just as global output is now performing a V-shaped recovery propelled by the need to restock depleted inventories, there is a strong risk that US employment does the same, with monthly payrolls growth surprising to the upside by the end of this year.”

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