A bit of weakness on the Dow & Nasdaq and out the bear pundits come ….this is the start of the new down leg…. there were 30% rallies at the start of The Great Depression to…….it is just a rally in a bear market! Those are the sorts of comments that have been coming out of pages of blogs/magazines/newspapers etc. Yes, if we look at the behavior of the Dow it does look a bit bearish. It has lost upside momentum and a break below 8000 opens it up for a retest of 6600!
But wait…….this time it is different. A few months ago weakness in the equity market was associated with strength in US Treasuries and the US Dollar. However now funds are piling out of the USD and US Treasuries.
Funds are now piling into assets that, only a few months ago, were considered to be just a few clicks away from “toxic waste” status. Those assets are:
- Commodities
- All things emerging market (currencies, bonds, and equities)
- Corporate and Junk grade bonds
- High yield developed market currencies
- Equities in general (and small cap in particular)
It has been interesting to note that, to date at least, there has been no apparent weakness in the former “toxic waste” asset classes. In fact not even the talk of down grade of UK debt, or the North Koreans testing a nuclear weapon has been able to dent the appetite for “risky assets”.
We do not know what the future holds, however, we do know that markets move in broad trends and that, once in place, these broad trends last for months/years (as opposed to days/months). Listen closely to what the market is telling you…………that is all you need to know. While commodities, emerging market currencies, and junk grade corporate bonds (to name three) remain strong we believe that the weakness we are observing in US equity markets is not the beginning of a new tradable down phase and that odds favor equity markets being higher rather than lower over the coming weeks.
