Global Equity Market Review

Source: Short Side of Long Blog

We have all been watching a correction unfold in global stock markets. Everyone is wounding whether or not it is a sign of something more worrisome to come. Depending on regions and sectors, the correction started in either middle of June or middle of September and global equity markets have been impacted with varying results. Some are down only a few percent while others have reached and bypassed a correction territory (10% or more on the downside).

Chart 1: Global stock market indices have been quite weak as of late!

World Breadth 

Source: Short Side of Long

Breadth has weakened meaningfully around the world. As of last Friday, we had less then 30% of important global stock markets trade above their respective 200 day moving average. MSCI World Index has only 37% of its components trade above their respective 200 MAs, while Europe has actually become extremely oversold at only 12%. It seems majority of the weakness is coming from foreign stock markets, as the recent US Dollar rally has put a decent amount of selling pressure on various stocks. However, bullish sentiment on the US Dollar is now at nosebleed levels so it would not surprise me one bit to see a pullback here. This could give global markets a bit of a relief.

Chart 2: S&P together with many other markets put in a strong reversal

S&P 500 

Source: Bar Chart (edited by Short Side of Long)

It seems to have started yesterday with S&P 500, together with the rest of the global stock markets, putting in a very strong reversal. As we can clearly see from both Chart 2 and Chart 3, US large cap equities continue to outperform the rest of the world, by trading above both the 200 MA as well as remaining above its rising trend line. Finally, while volatility is showing an uptick in recent weeks, so far it has been contained and compressed. If it does breakout, bears might finally be taking charge of the trend. Let us remember that this is an important juncture as Fed policy is changing and there is possible room for much higher volatility if markets throw a tantrum.

Chart 3: US stocks still in uptrend, with volatility compressed for now… 

Volatility Index 

Source: Short Side of Long

So how important was last nights reversal in equities? I am not 100% sure as it is extremely hard to predict the future in the short term with high accuracy. Obviously, stock markets became oversold (look at the breadth readings in links again) so it is not surprising that we now attempting to rebound. We have to let the rally unfold a little and judge its breadth and price character, together with the way various stocks markets around the world perform. This would give us more information as to whether we should position for the bullish or the bearish trend.

Chart 4: US, Eurozone & Emerging Markets have diverging stock cycles

Global Stock Markets 

Source: Short Side of Long

Bulls will claim that the US equity market trend remains in place and the yesterdays reversal is yet another buying opportunity signal. If bulls are correct and if I was bullish, I wouldn’t be necessarily buying US equities here as they remain on the very expensive side. Maybe one could do better in GEM equities, which have overwhelmingly under-performed the world index. This is even more true if you believe the Dollar has topped out for awhile and could pullback, giving foreign equites a chance to rebound.

On the other hand, bears will claim that global stock markets are starting to break down as the 2 year uptrend finally comes to an end. They would view yesterdays price reversal as a temporary rebound from oversold conditions, before another leg down. If bears are correct and if I was bearish, I would be looking to short the stock markets showing most technical damage and breadth deterioration.