Wednesday, October 24, 2012

Time for bulls to throw in the towel?

At the height of yesterday's (Tuesday's) market selloff, I was asked, "Are you throwing in the towel?"

My initial reaction was, "Not yet, but getting close." After the market close, I reviewed Tuesday's market action and revised my conclusion: These are not the kind of conditions where intermediate term declines normally begin.

Let me explain by recapping how Tuesday unfolded. The day began with weakness in the European bourses. Yet, a glance at the relative performance of eurozone equities against the MSCI All-Country World Index (ACWI) shows that Europe remains in a relative uptrend. No signs of any technical breakdown there.

As the market opened in New York, stocks were hit by earnings disappointment from the deep cyclical Dupont (DD), which saw a selloff on huge volume.

Does this mean that cyclical stocks are finished? Is it time to throw in the towel? Not quite. In fact, the Morgan Stanley Cyclical Index (CYC) actually outperformed the market on the day. Is this a picture that suggests Mr. Market it's all over for cyclical stocks?

Measures of risk appetite, such as the relative performance of Consumer Discretionary to Consumer Staple stocks actually advanced on the day. Does this look like a panic selloff? Or an indication that someone is accumulating the high beta Discretionary stocks on weakness?

To be sure, not all is well with cyclical indicators. In particular, the behavior of Dr. Copper is a concern. Copper staged an upside breakout in early September and attempted a high level consolidation, but failed. Now it appears to be testing the former breakout level of 3.55, where technical resistance turned support.

Despite copper's sloppy action, there are indications that China, which is the largest global marginal user of most commodities, is experiencing a soft landing as its HSBC flash Manufacturing PMI jumped to a three-month high (also see my previous posts China dodges a bullet? and Is the World Bank downgrade of China's growth the nadir?). Such a soft landing should alleviate many concerns that China will be a drag on global growth in the near future.

Indeed, the relative performance chart of Chinese stocks (FXI) against ACWI is reflecting that view as FXI rallied strongly in early October and broke out of a relative downtrend.

In short, my inner trader's advice is not to panic. Market internals suggest that the trend remains up. Tactically, traders should be giving the bulls the benefit of the doubt (for now).

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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