Monday, June 27, 2011

Bear are in control around the world

As US equities tests its 200 day moving average, I took a tour around the world. The picture isn't pretty. It shows a market environment of the bears in control of the tape.

Starting in the US, a look at the SPX shows that the average is testing its 200 day moving average. Note how the 50 and 200 day moving averages are converging with the 50 day MA falling and the 200 day MA rising. Unless the market stages a significant rally here, we are likely to see a Dark Cross (indicating that a downtrend has begun) within a month from now.

Markets are breaking down in Europe
Moving across the Atlantic, the UK market has already broken down its 200 day moving average. At this rate, it could see a Dark Cross within a week.

On the Continent, the STOXX 50 has already experienced a Dark Cross indicating a downtrend in prices.

China plays look bearish
In Hong Kong, the Hang Seng broken support in mid-June and saw a Dark Cross last week:

The picture for the Shanghai market is a little better. Although the Shanghai Composite did see a Dark Cross last week, it rallied above a key resistance line after Premier Wen Jaibao declared victory over inflation in an FT Op-Ed  last week.

It looks ugly in CommodityLand
Regular readers know that I watch commodity prices closely as the canaries in the coal mine of global growth and asset inflationary expectations and commodity prices offer a slim ray of hope. A look at the CRB Index shows that commodity prices are testing its 200-day moving average, but the 50 and 200 day moving averages are also exhibitng the same pattern of convergence. We are likely to see a Dark Cross indicating a downtrend within a month.

The charts of the stock markets of the commodity tilted economies look uglier than the commodity complex. Here in Canada, the S&P/TSX Composite has already broken down below its 200 day moving average and it's showing the same pattern of converging moving averages leading to a pending Dark Cross.

Australia looks worse than Canada. The All-Ords has already seen a Dark Cross and the market appears to be in a well-defined downtrend.

The Russian market also broken down below its 200-day moving average for the second time last week.

Other BRICs in downtrend since March
No review of global stock markets would be complete without a visit to all of the BRIC countries. Here the picture looks uglier. Brazil saw a Dark Cross back in March and the market is in a well-defined downtrend.

The Indian market also saw a Dark Cross in March, though it is trying to stage a rally up to test a key resistance level.

A ray of hope?
The one ray of hope that I can offer the bulls is a mild positive diveragence showing that the market internals appear to be turning around a little bit. My favorite measure of risk appetite, namely the relative returns of Consumer Discretionary to Consumer Staples, is turning up. As the chart below shows, that ratio is rallying up to test a relative downtrend line.

The cyclicals are also showing a similar pattern of rallying on a relative basis.

I will be watching this space closely to see if risk appetite can come back in this sea of gloom. Given my previous observation about the weakness of the banks signaling rising systemic risk in the financial system, I am tilting bearish but I remain willing to be convinced otherwise (see my previous comments here and here).

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