Index Jul12.pngFinancial markets cannot make up their minds about the outlook. As this month’s IeC Boom/Gloom Index shows, sentiment (blue column) remains exactly at the dividing line between optimism and pessimism.

This parallels the behaviour of the S&P 500 Index (red line). It had recovered strongly from March 2009, but has since found it very difficult to break through the 1370 level (thin red line):

• It peaked at this level in April 2011
• It broke though briefly in March/April this year, but then slipped
• It is now making its 3rd attempt

There is nothing ‘magic’ about the 1370 level. In good times, markets trade on fundamentals and will move forward if companies seem confident and earnings forecasts are positive.

But these are not good times. Markets are being kept alive by liquidity injections from central banks in the form of quantitative easing (QE). They rally, as last month, when these QE programmes are extended.

But successful traders are not stupid. They know that today’s economy is very fragile. So they are very careful about how they place their bets. 1370 has been the top of the range for some time, so they will be wary about becoming too optimistic.

Of course, the central banks may be right, and the blog wrong. Perhaps these latest QE efforts will succeed, where all the others have failed.

But the Boom/Gloom Index suggests caution remains the operative word.