Rally unreliable

Yes, markets have taken some lumps in the past few sessions as rising oil prices have rightly unnerved stock investors. But despite recent losses, the Hang Seng Composite is still up 15 per cent from its low in late March. The Straits Times Index and Sensex are up about 11 per cent, and Australia's S&P/ASX 200 up nearly 13 per cent – not a bad showing for two months.

And volatility has decreased.

But it would be a mistake to presume this means the outlook for Asian companies is actually better - for a number of reasons.

For one thing, Asian markets aren't the leading indicators you'd expect them to be, says Markus Rosgen, regional equity strategist at Citi Investment Research.

Rather, historically speaking, Asian stockmarkets have done a poor job of serving as forward indicators of which direction earnings growth is heading.

Rosgen thinks this can be explained in some cases by the fact "Asian equity markets are still driven by retail rather than institutional investors," and retail investors "react to what they have read in newspapers or seen" on television.

In other words, rather than being a sign of substantive demand based on expectations for a turnaround ahead, the recent gains are mostly just small, short-term players buying in reaction to what is often old news.

One clue to this: Trading volumes have plunged despite the gains. In Hong Kong, for example, total turnover in March and April was half that of February and a third of that seen in January. And fund managers continue to say they favour cash over stocks.

Retail traders are often picked on as a source of less-than-intelligent moves in the market, and to be fair stocks aren't the only indication of easing concerns about the future.

Since the Hang Seng hit its recent bottom on March 20, the cost to insure against default on Asia's US dollar bonds has also eased sharply. The latest series of the Markit iTraxx Asia ex-Japan high-yield credit default swap index stood at 655.5 basis points back then. On Monday it was closer to 485 basis points, a considerable easing in risk perception.

But traders, of stocks or credit insurance, don't operate in isolation. And this may be where the real problem lies: Analysts typically miss the mark as well, Rosgen notes.

And that could be giving investors a false sense of hope, that will be roundly diminished as revisions to earnings growth targets start to hit stock prices.

In previous downturns it has taken nine months of downward revisions before things bottom out, he says - so if history is any guide there's more pain ahead.

And there's another reason to doubt the recent gains. In past recoveries, consumer-oriented stocks have been among the top performers - whether the retail or consumer goods and services sectors, writes Lehman Brothers strategist Paul Schulte.

Why? Because investors are anticipating a rebound in consumer spending.

This time around, though, consumer sectors are nowhere to be found. Materials and energy stocks are certainly faring well, for obvious reasons. And banks, which were due a rebound, are enjoying nice gains.

But Asian consumer stocks are among the worst performers during the recent rally, Schulte notes.

There's probably good reason for this. Inflation is taking a bite out of consumers around the world.

If consumer spending is the bulwark of global economic growth, caution on consumer stocks might be a more useful indicator of what's to come than broad market gains.