24 Oct 2012

Flash Update

The Dow dropped almost 500 points in over three days, sparking concern that this could be the end of the rally.

However, looking at how other markets have been performing, the internals of the stock market, and the psychology of investors suggest that a market top at this juncture is unlikely.

One, in the run up since June, we find other asset classes like bonds, commodities and currencies gaining against traditional safe havens. Even during the recent consolidation period since mid-September, there has been strength in junk and EM bonds.

Image courtesy of Stockcharts.com

Image courtesy of Stockcharts.com

TED spreads even decline over the past week despite the higher volatility in equity markets.

Image courtesy of Stockcharts.com

Looking at market internals suggests that the market has not deteriorated. The % of stocks showing bullish trends remains high and has not worsened significantly, even in recent times.

Image courtesy of Stockcharts.com

Logically, we ought to have a correction in markets after a strong rally since June, this is both natural and good for the longer term. Markets and companies have been telegraphing poor earnings for Q3 and the current dismal earnings season is historical, outlooks are cautious due to recessions in Europe and a potential fiscal cliff in the US. The October fund manager survey may have turned more bullish but majority still think profits will deteriorate over the next 12 months. With the consensus still cautious, from a psychology point of view, it is difficult to call for a market top at this moment.

Hence we are of the opinion that markets are just going through a correction. Nevertheless we are keeping close tabs and will take action if necessary.

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