Is the global stock market rally sustainable?

The Stock Markets across the world have risen sharply since 4th Oct. In just five trading days the DJIA rallied 1,030 points (10%), the S&P 500 rallied 120 points (11%), and the NASDAQ rallied 268 points, or 11.66%.

So why is this rally at all?  

The foremost reason of this rally is that investors around the world are beginning to believe a European fix is on its way. Last Tuesday headlines crossed stating that European Union finance ministers are examining ways of coordinating recapitalizations of European Banks.

Then over this past weekend the Prime Minister of France, Nicolas Sarkozy and German Chancellor, Angela Merkel met and promised to strengthen European banks. Also over the weekend, investors were relieved to hear that the Franco-Belgian bank Dexia was partially nationalized. Dexia needed rescue because owns large amounts of government bonds of indebted countries like Greece and Italy.

In addition to this news out of Europe, investors were relieved that last Friday’s unemployment report was relatively positive. Though the number wasn’t anything to celebrate, it shows that the US economy is maintaining growth, as weak as that growth might be.

So is this rally for real? Have we seen the lows for 2011?

If Europe really has turned the corner in its financial crisis and acts quickly and decisively, than yes, we could have seen the lows for 2011 but no one knows for sure that that’s the case. At this point we are awaiting the G20 summit which is scheduled to begin on November 3rd. That is when Sarkozy and Merkel have said they will release the details of their comprehensive package to ease the euro zone’s debt crisis.Until then the markets are rallying on "hope." However, hope isn’t an investment strategy and there are too many uncertainties to deal with in coming weeks. So it would be advisable for the investors to stay extra cautious and be light on the positions in the market until G20 summit.

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