So perhaps the long anticipated sell-off is now taking place…..perhaps markets will rally strongly tonight and close at a new high by week end. If only we had that crystal ball! Of course two months from now we will know a whole lot more but of course by then it will be too late. We are first and foremost trend followers, not so much trend followers of stock indices rather trend followers of the mood of the market. We use a number of methods to gauge the mood of the market four of which are depicted below. Generally in times of risk aversion problems first show up in the more “risky” securities of each asset class. For bonds it is high yield corporate bonds, in equities it is the broad market and emerging markets, and in currencies it is the high yield currencies (of which the AUD is one of them). Of course there are more indicators that we could incorporate such as the performance of emerging market small caps, US micro-cap stocks, emerging market currencies like the Ruble, Real, and Rand, emerging market sovereign bonds, and commodities in general. However, we have space limitations so we have just included four below.
For each graph we have included the 50 and 200 day moving average. There is nothing special about the 50 and 200 day moving averages, they are there merely to give one a quick representation of where each chart lies based on different time frames. Bullish or bearish? Well a quick glance at each indicator reveals that they are all trading above their 50 and 200 day moving averages. Furthermore, all four of the 50 day moving averages are positive on a rolling 12 week basis. On a very short term basis weakness has only showed up over the last two days in most of the indicators below and that volatility, with the exception of the Value Line perhaps, is not out of the ordinary.
Our proposition is this: we have been expecting weakness to occur in risky assets for over a month now, so the weakness we experienced last night is perhaps somewhat overdue. That being said, we have not seen any evidence (as in out of the ordinary behaviour) that suggests markets are about to turn bearish and that there is going to be a flight to safe haven securities again. Yes, we may well be looking at material downside straight in the face but until we have enough evidence to suggest so we see yesterday’s weakness in the US as a buying opportunity not selling, our fundamental view also supports this as well.
