Will Europe do a Lehman Bro?

Over the past 3 days, I posted 3 trading BUYs- Haio, IRCB & LBS. These are trading ideas that I felt comfortable with, though on the whole I am not too comfortable with the market.

Let's look at the charts of MSCI EAFE & MSCI World indexes (Chart 1 & 2). The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East), excluding the US & Canada. The MSCI World Index is a stock market index of 1500 'world' stocks and it is often used as a common benchmark for 'world' or 'global' stock funds.

We can see that the 50-day Exponential Moving Average ('EMA') has crossed below the 100-day & 200-day Simple Moving Average ('SMA'). This is denoted as 'X' on Chart 1 & 2 below. We can see that a similar cross-under happened in early 2008 but the market managed to rebound back in April & May 2008 before the sharp selldown kicked in one month later, in June. The whole chain of events in 2008 is denoted as 'Y'. In the current cross-under, some are hopeful that a rebound would come shortly before a selldown set in. While many things can happen over the next few weeks or months, it's better & safer to accept that the current cross-under has signaled the end of the bull market & possibly the beginning of the bear market.


Chart 1: MSWorld's daily chart as at June 9, 2010 (Source: Stockcharts)


Chart 2: MSEAFE's daily chart as at June 9, 2010 (Source: Stockcharts)

The other charts that may provide some guidance to the state of the market or economy is the CRB & WTIC indexes. From Chart 3 & 4 below, we can see that the 50-day Exponential Moving Average ('EMA') has crossed below the 100-day & 200-day Simple Moving Average ('SMA'). This is denoted as 'X' on the chart. The last time we saw a similar cross-under was in August/September 2008 [denoted as 'Y'].


Chart 3: CRB's daily chart as at June 9, 2010 (Source: Stockcharts)


Chart 4: WTIC's daily chart as at June 9, 2010 (Source: Stockcharts)

Another way of interpreting the above technical signal is that market players across different asset classes are anticipating the current European problems to turn ugly in the same manner that the sub-prime crisis did in September 2008. Will it happen? We will have to wait & see.