WHAT’S NOT
The Breaking Point?
Despite the recent relief rally, global stock markets seem nowhere near bottom yet
Confidence takes a beating Investors were shook up last month as negative sentiment evidenced in the selling across global equities markets was intense. The common major culprits are a further slowdown in China’s economy, a slowdown in global growth, the US Fed raising interest rates, and the unrelenting drop of oil. If you’re waiting for economic indicators and company fundamentals to give you a sign, you could be too late to reposition your portfolio. It was the economist John Maynard Keynes who said, “Markets can remain irrational for longer than you can remain solvent.” In other words, significant market movements do not have to make sense. Markets anticipate the economy, not the other way around, and they are telling us something.
Damage done A number of equity markets entered bear market last month, defined as a drop of 20% or more off the peak of a number of broad market indexes. This makes good headlines, but by itself a 20% drop doesn’t tell us much, although it does indicate a change in investor sentiment and outlook. More than a 10% decline is considered a correction, meaning that prices are in a readjustment period before the dominant bull trend continues. Japan, India, and UK equity markets entered bear markets. China has already been in a bear market, having fallen over 40% in August of last year. Bear markets are also present in Russia, Brazil, Germany, France and Spain, over 40 markets globally, according to Bloomberg.
Primary trend is down Greater insight can be gleaned from looking at the damage done to the price trends. The primary trend globally is down, with an
increased probability of a drawn out decline. Each of the new bear markets got there by triggering sell signals of the descending trends already in place. This also happened with the major indexes for Australia, Brazil, France, and Spain. In many cases indexes fell below the August 2015 spike lows, which was the prior low. Together, this points to more pain ahead for stocks over the coming months.
Go long what’s been weak In the interim, markets reached extreme oversold levels towards the end of the month, which bought in buyers and relieved pressure from sellers. Relief rallies began in global equities, and in oil. How long these rallies last is unknown, but given the damage done and the severity and speed of recent declines, the odds for an eventual test and drop below the lows is high. There are essentially two ways to play the upside volatility. One, take advantage of relief rallies by buying with a short-term time horizon, and second, lighten equity exposure to your existing portfolio during rallies.
Watch for a sellable bounce For larger potential moves, sell stocks short once there are signs that a relief rally is over, to take advantage of the next wave down. Rallies can be expected to be hit by selling as investors better prepare for the next sell-off that could take the markets below the current developing bottoms. Keep an eye on the US as it’s held up better than most. Key support was tested last month, and if decisively broken to the downside we could see a bear market there as well. This would put further pressure on stocks across the globe.
By Bruce Powers, CMT, Chief Market Analyst at
MarketsToday.net, and President at WideVision February 2016 |
www.wealth-monitor.com
Given the
damage done and the severity and speed of
recent declines, the odds for an
eventual test and drop below the lows is high
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