What next for equity markets

We are already in May, and speculators, punters, and investors are now trying to decide whether the recent rally is a bear rally or the start of the next uptrend. Yesterday we saw the first really negative day in a while. Chartists are carefully studying resistance and support levels, looking for signals that foretell what’s next for equity markets. Personally, I belong to the self-fulfilling prophecy camp regarding charts, but I know many people place considerable importance on them. It is also fair to say that they provide a way to express sentiment visually. Some will find comfort in what they currently see, while others will heed warnings of future volatility. The Nasdaq, for instance, is hovering just below its 200-day moving average.

One major bank’s funds flow data suggests that investors used the volatility in the past month to add to their holdings in technology shares. Energy, along with healthcare, remains deeply out of favour. For those who believe in buying the most unloved and selling the loved, long oil and short tech is your trade. Sentiment remains cautious; traders often talk about the pain trade, that the market goes in the direction that causes the most pain to investors. Currently, that could still be up; the recent Merrill Lynch Fund Manager survey suggested money managers are still cautious and are holding high levels of cash, so any dips could find natural support.

Later today, the Fed will announce its latest rate decision, and no change is expected. However, the market will be watching for its forward guidance. Are there any hints that it may begin easing policy next month, as the market now expects? The jobs data released at the end of last week was stronger than the market anticipated, effectively reducing the likelihood of any action from the Fed later today to zero. In contrast, on Thursday, the Bank of England is expected to cut rates by 25 basis points, paving the way for further cuts in the coming months.

Warren Buffett announced this week that he is stepping down from his role as CEO of Berkshire Hathaway at the tender age of 94, with a record amount of cash on the balance sheet. I believe he informed his wife of his plans about 50 years ago, but somehow clung on. He is a man whose only real pleasure in life was taking the money he had to make more money with it. His returns over the years have consistently outstripped his peers, doing what appeared to be nothing more than buying quality companies on reasonable valuations. He never seemed to indulge in any of the luxuries that many who achieve great wealth do. It is more than fair to say he certainly did his part to help good charitable causes.