We started analyzing the Global Equity Proxy Index last November, in order to better gauge the market direction. At that time, it was mentioned that this index was in the bear market territory, and was one of the reasons why we stayed on the sidelines for so long. In other words, while the US stock market was rallying, global equity markets were not. This suggested that there was something financially wrong on the global scale.
This argument makes more sense if you take into account the fact that the debt problem is a global issue. And when you couple the debt problem with European and Chinese economic slow down, it paints a very dangerous picture for the stability of the global economy. Under such circumstances, it is hard for US to keep marching forward: Either US will catch-up with the global markets to the down side or global markets will start rallying sharply. Although there is also a third option of Fed printing more money, but that is not happening today.
Therefore, right now the first scenario is playing out i.e. the global markets have started pulling down the US stocks.
Technical Developments
On the weekly timescale, the global equity index has found resistance at the long-term moving average (shown below). This moving average has been the differentiating factor between a global bull and global bear market, for at least last 10 years. For example, market stayed above this MA from 2003 to 2007, and then stayed below this average from 2008-2009. At the same times, the indicators are tiring. Therefore, this tells us that we are in a territory where caution is required.
Elliott Wave Analysis
As is evident from the chart, the global index decline sported a clear 5-wave structure from the top in May 2012 to bottom in October 2011. Since then it has risen in 3-waves. 3-wave rise is a classic correction pattern. Furthermore, Wave a = Wave c. In other words, 5-waves decline when followed by a 3-wave rise, suggests that the trend has reversed.
To summarize, there is a high potential that we have already seen the market top. In case, global equities can rally and sharply break above this important M.A., situation would change. However, until then one should be very careful.
This argument makes more sense if you take into account the fact that the debt problem is a global issue. And when you couple the debt problem with European and Chinese economic slow down, it paints a very dangerous picture for the stability of the global economy. Under such circumstances, it is hard for US to keep marching forward: Either US will catch-up with the global markets to the down side or global markets will start rallying sharply. Although there is also a third option of Fed printing more money, but that is not happening today.
Therefore, right now the first scenario is playing out i.e. the global markets have started pulling down the US stocks.
Technical Developments
On the weekly timescale, the global equity index has found resistance at the long-term moving average (shown below). This moving average has been the differentiating factor between a global bull and global bear market, for at least last 10 years. For example, market stayed above this MA from 2003 to 2007, and then stayed below this average from 2008-2009. At the same times, the indicators are tiring. Therefore, this tells us that we are in a territory where caution is required.
Elliott Wave Analysis
As is evident from the chart, the global index decline sported a clear 5-wave structure from the top in May 2012 to bottom in October 2011. Since then it has risen in 3-waves. 3-wave rise is a classic correction pattern. Furthermore, Wave a = Wave c. In other words, 5-waves decline when followed by a 3-wave rise, suggests that the trend has reversed.
To summarize, there is a high potential that we have already seen the market top. In case, global equities can rally and sharply break above this important M.A., situation would change. However, until then one should be very careful.
I'm hoping this is the real correction. I pulled out almost all of my investments yesterday and today. I'm going to cross my fingers. I'll buy again in September time frame. What do you all think the elections will do to the market?
ReplyDeleteAs much as I would like to agree with you, I am waiting for the completion of the 8/4 test to the downside. This has not happened so far. In order for this to occur, the market (SP500) should first test 1340 area followed by a rally to key resistance areas and then a failure. As long as the 8/4 test remains incomplete, there is still the possibility that market might rally through summer (albeit very slim possibility).
ReplyDeleteIn the short-term it would be interesting to see how the next few days turn out. In order for the market to continue its decline, we should first rally in the short-term. Since we are in the IPM turn window and earnings season has started, it would be appropriate to see the market rallying up till Thursday followed by another decline. This would be the most appropriate scenario because currently we are not seeing any real panic in this selling, as evident from put-call ratios. This suggests that there is more decline to come.
On the other hand, if the market bottoms within the next few days and rallies sharply, it might be starting the next rally leg. But this scenario would require the global equity index to rally also, which looks a lot lower probability.
Please note that European markets have already completed the 8/4 test to the downside. Hence, Europe is again in a downtrend!!!!