Futures are up this morning as the market makes a bid to resume its rally. While the all of the major market indexes have regained their 50-day moving averages, the Russell 2000, surprisingly, made a new closing high on Friday, putting that index in a de facto rally resumption. Overnight, European bourses are rallying sharply while China sold off on continued economic and monetary policy worries.
Digressing for a moment on the China situation, the recent spike in China's inter-bank lending rate caused a huge sell off in China's markets two weeks ago. Chinese markets stabilized, however, when it was believed that the worst of the liquidity crunch was behind them. This is somewhat akin to the liquidity crunch in the US in 2008, as well as the subsequent crisis Europe a couple of years later. Two weeks ago, as the liquidity in China was reaching a head, the Chinese central bank said it had no intention of injecting more liquidity into the Chinese banking system, and that banks needed to do a better job of shoring up their balance sheets. This is essentially "tough love," which in our view is the correct way to deal with weak banks on the belief that no bank is too big to fail. When a country or company or even a bank is bankrupt, they're bankrupt. A country should not deny it and try to prop them up. Obey reality. In Scandinavia in the early 1990s, similar problems arose, but the monetary authorities decided it was best to let banks take their losses. As a result they suffered much pain for a few years, but once the system had been cleansed and the zombie businesses and banks were pushed out, they boomed again. Perhaps China has learned the lessons of others and is the wiser here.
3-D stocks Three D Systems (DDD) and Stratasys (DDD) made strong move on Friday on news that Microsoft is engaging in a "push out" of 3-D systems by including a native API in its upcoming Windows 8.1 update. The movement of 3-D printing into the consumer mainstream could be a driver for continued upside in these stocks. Both stocks are trying to break out of sloppy patterns, which may lead to some volatility on these breakout attempts. However, if the price/volume action remains consistent and some of the sloppiness is squeezed out of the patterns by the breakouts, then they become quite buyable. It may be best to watch for the first pullbacks in these stocks, particularly SSYS given its extended move so far, for signs of constructive action that may be bought into.