``At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way...When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance." Chuck Prince, the CEO of Citigroup
At the start of the week, I was recently asked by a reader at my blog, if this signals the end of the global bullmarket.
To which my reply was, “As Scottish Philosopher Thomas Carlyle once wrote, ``Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand.
“What lies clearly at hand is the violent reactions seen in the world markets.
“If in the past, world markets have been buttressed by the abundance of liquidity, what appears to be a drag to the markets today is exactly the opposite.
“My understanding of the markets is that we are faced with serious headwinds and in my case would necessitate to react accordingly.
“If it is just a bear trap, then opportunities will allow us to earn again.
“If our fears translate to market mayhem then we'd be sulking on losses on a ladder of hope.”
Moreover, we’ve been asked if these developments could be indicative of a possible end to the recent streak of losses or a potential bottom which could present itself as a buying opportunity. Albeit in most instances, most of our queries manifested signs of consternation (beneath the surface) on the unfolding events in the markets.
The investing public is today groping for an answer on what they think as unseemly. Some have even attributed domestic political events as possible causes, which we believe are entirely irrelevant. Such is called the information bias - the tendency to seek information even when it cannot affect action (wikipedia.org) or the “Narrative fallacy” – our need to fit a story or pattern to a series of connected or disconnected facts (Nassim Taleb).
And yet there are those who have come to believe that every action in today’s market postulates a replay of the recent past (anchoring), or that recent countertrends will ONLY pose as buying opportunities as in February of this year (corrected by about 12.5% peak-to-trough), May 2006 (about 19%) or March 2005 (about 16%), where possibilities that our Phisix has entered into a cyclical bearmarket (within a secular bullmarket) has been ruled out.
Could this be a bottom? Yes it could. Could this be a buying opportunity? Perhaps, but I certainly wouldn’t bet on it.
Technically speaking, the Phisix from its July 13th zenith at 3,820 has corrected by about 12.5% (peak-to-trough-assuming that the recent low is a bottom; again I wouldn’t bet on it). So essentially the recent market actions have been in line with its normal comport, which gives the bulls their confidence to declare a bottom.
However, we must be reminded that the Phisix has been largely DRIVEN by global money flows which have in MOST occasions reflected on the actions of mainly the
Put differently, we shouldn’t depend on the technical picture of the Phisix, unless our benchmark has concretely manifested signs of independence or distinction from the movements of the world equity markets. As we always say, a correlation is a correlation until it isn’t!
Figure 1 stockcharts.com: World Markets Breakdown!
The US S & P 500 (at the topmost pane), the Dow Jones WORLD index (above pane below center window), and the Dow Jones Asia Pacific Index (lowest pane) have recently, similar to our Phisix (main window), broken below its key support levels.
With the fresh breakdowns in the international arena, momentum implies that our Phisix could likely be further affected. My conjecture is that the Phisix could possibly test the 3,200 level soon marked by the 200-day moving averages seen above, as the decline in global markets could accelerate. A break below 3,200 delivers us to the bear territory.
Not to be accused of data mining or selective reporting, we should equally note that emerging market indices are at present perched at similar key support levels BUT HAVE YET to breakdown as its peers. Our hypothesis on this divergence: since
Now, if one believes in the maxim that “a trend is our friend” then manifestations of these vital transgressions suggest of a REVERSAL in the bullish sentiment. In short, the burden proof now switches from the bears to the bulls, where the path of least resistance is most obviously down.
Well of course, given the recent rout we cannot discount the possibility that the market may undergo some technical bounce. However, we shouldn’t take this as signs to favor the bulls back in fashion unless key resistances will have been taken out.
I have been indisposed to take much of the required actions simply because I wanted to see added confirmations from overseas. However, the activities in the domestic market have been climactic.
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