Stock markets ripe for correction, but …

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I am on the road today tending to a few business matters – in an environment in which South Africa has just seen its third consecutive quarter of negative GDP growth – and the mood is not entirely upbeat.

Back to the yin and yang of equities: I have tried arguing over the past week or two that global stock markets were grossly overbought and out of kilter with economic reality, and therefore ripe for correction – a process I believe has now commenced (also for commodities, and the reverse for safe-haven assets such as government bonds, the US dollar and the Japanese yen). I have also mentioned that we may see at least some degree of reversion to the 200-day moving averages in a number of instances.

It is perhaps premature to say whether we will be dealing with a normal short-term correction or a more significant move threatening the primary trend. However, when considering longer-term data, it would seem that any correction may still be part of an overall bottoming-out process. The chart below shows monthly intervals for the S&P 500 Index since 1998 and conveys an important message when considering the three momentum-type oscillators at the bottom (RSI, MACD and ROC). These are reversing course for the first time since the primary sell signals of 2007 and now either indicate buy signals (or are getting close to them in the case of MACD).

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Source: StockCharts.com

I need to be off to my appointments, but thought I would just share this thought with you while we remain cautious and await Mr Market to offer us stocks – especially in high-growth markets such as China, India and resource-based economies – at more realistic levels.

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5 comments to Stock markets ripe for correction, but …

  • Mike Mennell

    very useful info. love this site. Offers many differing viewpoints. Where does Prieur get the time??

  • MIke: Thank you for the positive feedback! Time? Quite frankly I have no idea, but for the moment most of the balls are still in the air …

  • Jason Sinclair

    Prieur,
    If you look at the 14 day RSI and daily MACD for the S&P 500 as produced by John Murphy at StockCharts in his 17th August report, it shows a very different picture of the market being overbought and hence greater downside potential.
    Why is this so different to the one above???

  • Jason: I agree 100% with John Murphy regarding the short-term situation (based on daily data, indicating the secondary trend). The market is overbought and daily sell signals are in place. All that I was trying to highlight was that the longer-term trend (based on monthly data, indicating the primary trend) is showing signs of bottoming out. Murphy also sees the situation like this.

  • I bumped into this wonderful post, some time after my big hair cut (by wall street).

    I’m a longtime real estate broker. Here the rewards are chicken feed compared to wall street. Also, there’s very rigorous “Fiduciary Duty” rules, imposed from Federal and State level, in order for brokers to keep their license.

    Hence, it’s a wonder to me, that Wall Street is operating without any concept of “Servant Fiduciary”.

    With the infinitely cheap capital infusion from the Fed.(all these tax paying chickens), now they still behave like “Wolfs in the chicken coop”. Despite all their spins(They have no shame?).

    I know that, the main street, is hurting, big time! According to First American Title Company’s Core Logic:

    As of June 30, 2009, 32.2 % of all U.S. mortgaged properties, were underwater( with negative equity). The aggregate property value for loans in a negative position was $3.4 trillion.

    as of June 30, 45.7% of California’s home mortgages are near underwater. And average loan to value ratio in California is 81%! Similarly, 53% and 94% for Florida.etc.

    So, what’s next? A huge “Tsunami of foreclosure” coming!

    For the interested, here’s the link:
    http://www.loanperformance.com/infocenter/library/FACL%20Negative%20Equity_final_081309.pdf

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