My trend following system gave us a 'buy' signal a week ago. Since then, the market action has been choppy, but the major US indices are showing signs of strength. For instance, all the major US indices (Dow, NASDAQ Composite and S&P500) have now climbed above the 200-day moving average and volume has risen over the past couple of sessions. Furthermore, the NYSE Composite Index has also closed above the 50-day moving average.

In terms of technical data, it is notable that approximately 64 percent of the NYSE stocks are now trading above the 200-day moving average, the NYSE Advance/Decline Line is approaching its high and new 52-week highs on the NYSE have now expanded to 239. Furthermore, credit spreads are narrowing and the Volatility Index has retreated over the past week. Thus, all these data points are implying that this nascent uptrend will probably run for several weeks and we may get a strong rally heading into next spring. In any event, there is no need for investors to jump the gun.

The global economy is not flourishing and plenty of issues still need to be addressed. Nonetheless, it is interesting to observe that the market is ignoring the bad news and the two-month downtrend in risky assets seems to be over. Nobody knows for sure, but I am of the view that global stocks are rising primarily due to the central banks' ultra-loose monetary policy and as long as rates remain low, it is conceivable that all assets will remain inflated. In any event, unless you are an academic, there is no need for you to know why the market is rallying. The only thing which is important is that stocks are now in an uptrend. It makes sense for investors to swim with the tide.

Turning to commodities, it is noteworthy that the Reuters CRB (CCI) Index has now climbed above the 50-day moving average and it appears as though a new uptrend is now underway. Furthermore, the price of copper has also firmed and it is now trading above the 200-day moving average. These are positive developments and as long as the US dollar continues to weaken, it is likely that hard assets will appreciate in value.

Over in the precious metals patch, the picture is mixed and for now, silver is outperforming gold. At present, the price of silver is in an uptrend and the white metal is currently trading above the 50-day moving average. If this ongoing rally in risky assets continues, it is probable that silver will continue to do better than gold. Furthermore, if seasonal patterns play out, the ongoing rally may continue until next spring.

In the currency market, the US dollar is weakening again and it appears as though an imminent resolution of the fiscal cliff is largely responsible for this downtrend. Over the past week, the US Dollar Index has slipped below the 200-day moving average and it is currently sitting just above the 50-day moving average. In my view, if the American policymakers manage to come to a deal and avoid the fiscal cliff, the world's reserve currency will probably weaken further. Thus, this is not the time to be invested in US dollar cash.

Finally, over in the fixed income space, high yield bonds are rallying again and this is consistent with the ongoing advance in risky assets. Elsewhere, safe haven assets such as US Treasuries and German Bunds are facing some selling pressure and their slide may continue until the next bout of risk aversion takes over the marketplace.

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(HK Edition 12/01/2012 page2)