Interesting times ahead...

Over the past 1 week, another index (RTSI) had recorded a negative golden cross (or, the death cross). This means that the total number of indexes with death cross have risen to 8. I expect 4 more indexes to join the list this week. They are DJIA, S&P500, BSE & STI. Only 3 indexes are likely to be spared this dreadful technical event this week. They are DAX, Kospi & FBM-KLCI.


Table: Main market indices as at June 25, 2010 (Source: Stockcharts for all indexes, except FBM-KLCI where I rely on Tradesignum)

Despite this gloomy technical outlook, there are signs that risk aversion which gripped investors may be weakening. A widely used measure of market risk is VIX which is often referred to as the "investor fear gauge". From Chart 1 below, we can see that VIX, which spiked up in April, has corrected back substantially over the past 2 weeks.


Chart 1: VIX daily chart as at July 2, 2010 (Source: Stockchart)

Since the recent concern among investors is related to the fear of credit default among weaker European nations (which are commonly referred to as PIIGS) as well as corporate borrowers, one measure that we should look at is the TED Spread. This is the price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months. The TED spread can be used as an indicator of credit risk because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. From Chart 2 below, we can see that TED Spread had spiked up since April and has begun to correct in June.


Chart 2: TED daily chart as at July 2, 2010 (Source: Stockchart)

In the uncertain period of April to June, investors piled into safe havens such as USD & gold. This led to a sharp rise in USD & gold. Over the past few days, both USD & gold tumbled sharply & broke below their 50-day SMA lines. Is this the start of a correction for USD & gold? We will have to wait & see. See Chart 3 & 4 below.


Chart 3: GOLD daily chart as at July 2, 2010 (Source: Stockchart)


Chart 4: USD daily chart as at July 2, 2010 (Source: Stockchart)

Conversely, Euro- the currency in the middle of the PIIGS financial crisis- has begun to stabilize. Has it made a bottom? See Chart 5 below.


Chart 5: EURO daily chart as at July 2, 2010 (Source: Stockchart)

It would be a very interesting market for the next few weeks as investors slowly lose their risk aversion & possibly move back into the markets. Would this be enough to overcome the dreadful technical implication of the many death crosses that would confront them? We will have to wait & see.