On the face of it weakness/risk aversion (call it what you will) appears to have swamped world financial markets again. This is both from the “technical” patterns emerging in the major market indices (e.g. the S&P and the CRB) and also the bearish rhetoric that has bestow not only blog sites but also the media of “popular opinion”. It is becoming increasingly difficult now to find anyone willing to stick up a bullish hand! Is the bearish sentiment warranted? Most major stock markets are down less than 10% from their highs reached in June and commodities as a group are down 10%. Considering the degree to which these markets advanced over the last 4 months one should have expected at least some consolidation of gains. Beneath the scenes it appears that the broader market is not as bearish as the average popular investor is making out. World small caps stock indices, junk grade and emerging market bonds have yet to show any weakness that is out of the ordinary. Furthermore, currency markets (aka the USD Index) are showing a good deal of reluctance in following in the bearish footsteps of major market equity and commodity indices. Last year currency markets actually led equity and commodity markets.
They say that bull markets creep up on you whilst you are least expecting it. We think that the weakness we are currently experiencing in markets/securities is the market’s way of shaking the weak hands out of the market! And given the dramatic increase in bearish commentary it appears that it is doing a fine job at it. Let us not forget that markets don’t go up in a straight line, they tend to zigzag their way higher to form a series of higher highs and higher lows. So far at least we have not had any violations of a lower low or a lower high. The reluctance of “traditional” high risk markets (like emerging market and high yield corporate bonds and small cap equities) to “willingly” participate in the downside of major market indices suggests to us that a long term bottom has already been put in for many markets and that 12 months from now markets should be higher rather than lower. Of course what happens over the coming days/weeks should only concern those of the short term realm!
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