Email of the day (2)
Comment of the Day

October 07 2011

Commentary by Eoin Treacy

Email of the day (2)

on the potential that a medium-term low is being formed:
"Good morning. Do you still feel this is a bear market on the S&P or a correction similar to 1998? I say this as some blue chip UK stocks are approaching/passing their May highs, which seems strange action for a bear market. Could we have now seen the low and is a very strong rally possible from here i.e. 30%?"

Eoin Treacy's view Thank you for this email which I'm sure others will also have an interest in. As you know, we have continually pointed out the relative strength of globally oriented consumer shares throughout this correction. The economic weakness evident in Europe and the USA is primarily as a result of the credit freeze that continues to assail those regions. Asia has the opposite problem, with inflationary pressures mounting and central banks attempting to curtail lending and credit growth. Many fear that China in particular is at risk of a marked slowdown and this on top of Europe and the USA's woes has sparked deleveraging.

There has already been a great deal of selling pressure across stock and commodity markets. Large capitalization markets such as the S&P500, Nasdaq-100, FTSE-100 and DAX have all stabilized over the last two months. At least a relief rally is underway in a number of industrial commodities as well as the precious metals.

Central banks in Europe appear to have accepted the argument that additional stimulus is needed to avoid recession. Stock and commodity markets generally tend to favour such news. Medium-term technical damage has been done, a large number of previously consistent uptrends have been broken. If a medium-term low is forming, the lows posted since August will have to hold. Oversold conditions relative to the 200-day MA have mostly been unwound. Sustained moves above them would help to crystallise a more bullish attitude.

I believe the potential that medium-term lows have been reached are better than even for US, UK and German markets. The DAX has a heavy weighting of industrially oriented shares and remains deeply oversold relative to the 200-day MA. It probably has the most potential for a short covering rally among these markets.

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