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It's The Office Boys Who Are Driving This Holiday Season Rally

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http://www.telegraph.co.uk/finance/comment...ason-rally.html

Ultimately, stock markets are driven by the outlook for corporate earnings. A number of US companies have surprised on the upside in their most recent results, though it is fair to say that quite a few others have disappointed.

None the less, this renewed focus on the positive is in itself an encouraging sign. Stock market values are determined as much by sentiment as underlying realities. As such, they frequently get things hopelessly wrong.

Yet they can also be important forward-looking indicators, and right now they seem to be reflecting the balance of probabilities reasonably well. In some respects, what's going on is just a technical rally of no great significance. In Britain and the US, the latest leg of the rally since March lows is as much caused by the closing out, or hedging, of short positions as anything else.

The upswing of the past few weeks has also been achieved on the back of quite low volumes. There's no great rush by investors to buy. Indeed, fund managers who are unambiguously bullish remain thin on the ground. The bullishness comes rather from investment bankers, who are not exactly impartial observers of events.

Even so, it may be wrong to characterise the bounce as no more than a "sucker's rally" in a prolonged bear market. In fact, it is much more akin to what used to be called an "office boys' rally", which again is a not uncommon phenomenon over the summer, when the big cheeses depart for their sunbeds leaving juniors under strict instructions to trade within narrow limits and do nothing to upset the apple cart.

It happened last summer too, when there was a similar lull in an ongoing crash. As soon as everyone got back from their holidays, the panic resumed with pitiless intensity.

Yet there are some genuine reasons beyond absent bosses for bouncing share prices. That peculiar stock market fascination with charts – followers of which can reasonably be compared to train spotters – points to higher ground too. Believers think that past patterns of stock market performance will be repeated.

To me, chartism is no more revealing than attempting to see shapes in the clouds, but to the initiated it's much more than that. If everyone can identify a bull in the cumulous, it can obviously be influential, for it helps to instruct investment behaviour. The same goes for the algorithmic, computer-driven trading on which so much stock market activity is now based. Much of this trading is momentum based, so once a vaguely bullish trend is identified, it can become self-perpetuating.

The business cycle is driven by many things, but confidence is the key ingredient. A revival in stock market sentiment can instruct a wider recovery in appetite for business and banking risk. Even when not rooted in economic fundamentals, a stock market bounce can, if sustained, thus become a self-fulfilling prophecy. In any case, it is a necessary prelude to economic recovery.

Unfortunately, stock markets are also capable of extreme delusional thinking. Looking at the fundamentals, the answer to the key economic question of our time is still as hard to answer as ever. This is whether a resumption of economic growth is in any way compatible with the pressure on incomes being brought about by rising unemployment, the need to repair household balance sheets impaired by years of credit-fuelled over-spending, and the severe fiscal squeeze that has to start kicking in towards the end of next year.

Together, these influences amount to a potent mix of headwinds which to many makes a return to meaningful growth seem virtually impossible. I would beg to differ.

Plainly the economy is going to take some years to get back to where it was before the slump, but having by the end of the downturn lost a likely 5pc-6pc of output, it would defy all previous experience if it failed to grow at all from this much impaired base.

So is it more an office boy rally?

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So is it more an office boy rally?

mmmm, I doubt it.

The concept of the big cheese going on holiday and leaving the junior on the desk is very old fashioned, pre-Big Bang stuff, which simply doesn't happen at the big US firms - particularly these days.

The article actually mentions what "used to be called an office boy rally", so it's an half arsed reference to start with.

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Each summer since 2007 they have used thin volume to buy as much ground as possible so the can afford to give it back when the next bout of fear arrives. In 07 after the credit crunched reared it's head with the BS hedge funds closing in Feb they pumped the market 2000 points on M&A's that never happened. Last year the summer proved valuable breathing space and this year they have exceeded themselves.

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