If this is the start of a bearish phase (something more than a 10% correction) then the market is certainly going about it in a most “untraditional” fashion. I say untraditional because generally the onset of a bear market is characterized by bulls refusing to throw in the towel, right now it seems that anyone who was remotely bullish some 5 weeks ago has had absolutely no problem in jumping to the bearish side of the fence. Secondly, a bearish phase is usually preceded by a breakdown in equity market internals, again up until a few weeks ago equity market internals were very healthy this is evidenced by the Russell 2000 making new highs and outperforming the Dow. One could also argue that usually there is a sell-off in risky junk grade corporate bonds. Yet prior to the 1st of May junk grade bonds were registering multi-week highs.
Perhaps more perplexing is how the sell-off has come on the back of no observable change in fundamentals for stocks. When I mean observable I am referring to company earnings, company earnings guidance and even analysts earnings forecasts. It seems that everyone has taken complete fright over the whole Greek debt crisis (ok it actually is a little broader than that now). Yes I am well aware that the market is selling off because it is factoring in a slow-down on the back of a “austerity” measures. But one wonders just how much government spending helped the lift the average company’s earnings over the last 12 months in the first place!
Of course there is something else that I am finding difficult to get my head around……should one go short now, given that;
- major market indices are down some 10% in a space of 4 weeks,
- sentiment (as measured by the ratio of stocks trading above their 50 day moving average) is at levels now comparable to early March last year,
- no significant support line has been broken in equities, commodities, treasuries, corporate bonds.
I certainly don’t want to be accused of being stubbornly bullish, or even a perma-bull, but I refuse to walk on the bearish side of the fence until there is complacency towards risk. A quick glance at blog sites suggests that the general crowd is far from being complacent towards risk. That being said, if the big support levels (as depicted in the charts below) are broken) I will have to either hedge long positions or heaven forbid turn bearish. We have already done so in high yield currencies.
Note it is only currency markets that have broken important support levels. That is real worrying because from an inter-market perspective problems in world financial markets more often than not first show up in currency markets.
