The first month of the New Year has witnessed global equity indexes rising across the board. Are we in a "risk acceptance" mode with global traders? On the face of equity futures performance, the answer is a resounding "yes." S&P 500 is up 4.52% in 2012. Cumulative volume, as examined by economist Doug Short, is down 21.6% compared to the first 12 days of trading in 2011.

This increase in risk acceptance is not based upon fundamentals of global economic growth reality, in my opinion, in as much as the rising Euro (consolidating after dropping below our 1.2850 target) along with China introducing new liquidity measures. Finally, a potential US Federal Reserve QE3 holds merit amongst the bulls.

Reality or Perception?

Last week I discussed the importance of understanding “perception.” It is the perception of better times ahead in six months that moves global traders to embrace risk. So let’s review perception driving the markets. We will start with the Euro.

The Euro zone is “fixing” Greece by pressuring Greek bond-holders to accept 50% or more loss on their investment. The perception here is that once Greece gets her debt issues behind her, the country can receive additional bail out money and greener pastures. This perception is very strong. The reality finds Greece will still hold enormous debt levels and continue selling bonds to survive digging the debt hole deeper.

The other day I posed the question, if Greece is allowed to renegotiate her debt levels dramatically, what is to stop Ireland, Portugal, Italy, Spain, et al. from demanding the same? Any civic-minded person in these countries should see the opportunity and push lending institutions to extend the same terms as Greece…which benefits taxpayers and society.

So this is just one of the next shoes to drop in my thinking. It is the worst night mare for international bankers, but honestly, how can they extend an offer to one country in fiscal turmoil without unintended consequences of other countries demanding the same treatment?

Our long-term indicator tells us at this point in time that Euro rallies will fail. Until this indicator changes, we have no choice but to accept the indicator mandate looking for shorting opportunities. Eventually the long-term indicator will change. We trade today, not eventually. A falling Euro generally begets a falling global equity futures scenario.

Chinese leadership has noted property prices falling for three months and industrial production still in the statistical area of contraction. The Bank of China has taken new measures to inject liquidity into their financial system. We know liquidity tends to lift perception of subsequent growth. This perception has immediately…like a knee jerk reaction…caused multinational iron ore firms and machinery firm stocks dealing in China to rise last week. I am talking specifically about CMI, CAT, CLF, two of which we have a position. Copper exploded higher taking FCX with it.

This action by the Chinese also serves to support the Euro on expectation of orders since Europe is the largest exporter into China.

Finally, the US Federal Reserve is once again “talking up” additional stimulus measures in various speeches by Federal Reserve representatives. This week global traders and institutions will pay special attention to Wednesday’s Federal Reserve Open Market Committee (FOMC) announcement at 12:30 PM ET, followed by the Bernanke 2:15 PM ET press conferences. This is a very important day for us due to the bullish camp expecting QE3.

Announcement of QE3 will immediately trash the US dollar and most all asset classes will start a sustained upward rise. It is my opinion QE3 will not be announced. The possibility of a selling down draught from bulls capitulating is very real. If the S&P 500 is up 4.52% in 2012, we could easily give up half this amount in one day of frenetic profit-taking.

Let’s have a firm understanding we still live in the days of 2%+ one day moves higher or lower. Volatility, while not shown on VIX as a concern; is absolutely higher due to below average trading volume.

Let’s also understand the market, like waves in the ocean, tend to see trading days crest and fall; ebb and flow. With the IMF banging the drum of global recession starting in the Euro zone and expanding outward like ripples in a pond we have continued need to exercise a cautious approach in our trading. If disappointment over QE3 surfaces then the upward market wave may crest this week.

We have traded the New Year predominately non-directional with a few upward directional trades. As we review the charts in the next segment of your newsletter we will determine if we should stay on course with this trading bias.

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.