Email of the day (1)
Comment of the Day

May 14 2012

Commentary by David Fuller

Email of the day (1)

On market performance:
"I wrote to you a few weeks ago about all the liquidity intervention from Central banks, questioning the endgame which you kindly replied to.

"Looking at financial markets at the moment, I don't doubt that developed market treasury bonds are very expensive, and high yielding equities with consistency of earnings and strong balance sheet offer far better fundamental value. Out of so called risk assets, the latter selectively and gold on weakness are where my interest lies at this point.

"Following on from that previous email, while there are some markets in the emerging space such as the Philippines and Malaysia (the former's economic fundamentals would seem to be arguably the best in Asia right now), I have been closely following some charts:

1) MSCI World ex USA - has broken below the 200 day MA which is pointing down - admittedly Eurozone equities would be a pretty big component of this although I don't have the weightings to hand.

2) MSCI Emerging Market IShare (EEM US) - same as above. Not doubting that there are areas which are attractive long term investments, but the timing doesn't look too good to be initiating long positions from a charts perspective?

3) The relative chart in your library on MSCI Emerging market equities vs S&P 500 - looks to be pointing to still lower levels on a relative basis would be my interpretation. Do you agree?

"As far as Wall Street is concerned, the S&P 500 hasn't broken down, but far fewer stocks made 52 week highs in the NYSE in March relative to February, and to me the chart action looks a lot healthier in utilities and staples, while cyclical areas of the market look rather weak.

"I agree that yet more stimulus this year could lead to some type of recovery again in risk assets, but it seems to me that a lot of the price action is already quite bearish as far as many risk assets are concerned, and has actually been pointing that way since February/March time.

"I find commodity price weakness a double edged sword - it's good for the consumer, but is the weakness symptomatic of weakening growth? After all, from 2003 to 2007, commodity prices were broadly going up, and risk assets were mainly in form?

"I guess I am asking this question - are we seeing the early stages of a bear market in risk assets generally with perhaps the exception of high dividend yielding equities and autonomies which you refer to?"

David Fuller's view Thanks for an inquisitive email, certain to be of interest to many other subscribers and I commend you for your own research efforts and use of the Chart Library. Here is a link to my earlier answer on 19th April to Email (1) which you refer to above.

On stock markets, Fullermoney's basic premise, repeated in Comment of the Day and just about every Audio since late March is that the stock markets we favour had commenced a well earned corrective phase following their strong gains from 4Q 1011 and particularly 1Q 2012. This was preceded by a downturn in troubled European indices. Eoin and I have also emphasised that this process was likely to last for a number of weeks and possibly several months during which equities were entering a less favourable period seasonally.

Looking at the charts you mention in 1) & 2) above - MSCI World ex USA & MSCI Emerging Market iShares (EEM US), they remain underperformers, becoming somewhat oversold but we have yet to see evidence that they are finding support from underlying trading. Re 3), I agree that high-beta MSCI Emerging market equities are still underperforming the S&P 500, having resumed their decline recently.

The Continuous Commodity Index (CCI) reset is good news for the medium term in that commodity price inflation continues to decline from its highs of 13 months ago, but this is mainly due to weaker global GDP as I have also mentioned in numerous Audios. To the extent that this reduces inflationary pressures in growth economies, it will make it easier for them to consider monetary stimulus. Unfortunately, it does not affect them equally and India's inflation actually rose last month, at least partly due to currency weakness.

In response to your important concluding question, the only objective answer is, yes, we could be in another bear market for risk assets because we have yet to see any evidence that this predictable corrective phase is over. However, one could say that about any downturn and I think it is more important to note that the S&P 500 (weekly & daily), although falling steadily for the last two weeks, has only declined 6% from its high at 1442.38 on 2nd April to its intraday low at 1336.61 this afternoon. It is also still above a rising MA.

Meanwhile, some short-term indicators are now oversold, but the news out of Europe remains distinctly troubling, and we have yet to see a catalyst capable of improving the situation. Needless to say this is unnerving for investors who recall downturns at this time of year in 2010 and 2011. My guess is that more monetary stimulus is on the way, not least from Europe which faces escalating social unrest if it cannot generate some growth and employment. Without a positive catalyst, current market momentum is likely to carry so-called risk assets lower before the next rally of consequence occurs.

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