Thoughts on the Recent Market Sell-Off
As US equities have not really corrected since Dec last year, it should not be surprising that we finally get one now. From a technical viewpoint, the US S&P500 index has cut through the 50-day moving average. However this is normal during corrections. In fact, the large correction happening now is an indication that the rally can be further sustained.
It must also be noted that the recent sell off is accompanied by lower volume (Figure 1), therefore there is a lesser need to worry.
Image courtesy of Stockcharts.com
Figure 1: S&P 500 Large Cap Index
The cause of the sell-off is that markets are still anxious about current problems like the European debt crisis, sustainability of the US economic recovery and a possible hard landing for China. However one good thing to note is that oil prices have started to come down, thereby reducing one key macro risk for markets. Meanwhile TED spreads (the difference between interest rates on interbank loans and short-term US government debt) remain steady, indicating no renewed credit stress.
Conclusion & Portfolio Positions
For now, we still see markets as going through a consolidation or correction. As such we do not recommend any changes to our portfolios for the time being.
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