nexttrade: Global Markets in correction mode

Monday, April 23, 2012

Global Markets in correction mode

Looking through some of the major indices, we can get the feeling that these markets are not in such a bad shape. For one thing, all of them are still trading above their intermediate uptrend line (SS) and secondly, they are all above their respective 200-day SMA line. While not discounting the possibility that these two important supports could be violated if Eurozone were to enter another round of crisis, we should treat the current market weakness as a much-needed correction after a rally that lasted 5 months. We must take into account that there were a few good news that the market seems to have ignored. They are:

1. The US economy is growing moderately, which was the basis for Fed's policymakers' decision in March to go slow on further monetary policies;
2. The Chinese economy may avoid hard-landing and is likely to continue to deliver 7-8% growth in the next few years; and
3. Commodity prices are stabilizing or even drifting lower, which should lessening inflationary pressure; thus enabling many central banks to reduce interest rate.

Admittedly, Japan is still struggling to start the engine of growth & Eurozone will be a real drag with its never-ending policies of spending cuts & tax hikes.

While things may appear gloomy at this moment, there are some pockets of sunshine in the global economy landscapes. The recent selldown in many financial assets simply means that investors are demanding a premium for holding risk assets, which is very normal. What is not normal or healthy was the situation that the financial markets were in 2-3 months ago, where almost everything were so rosy. I shall leave you with the thoughts from Howard Marks:

"There are few things as risky as the widespread belief that there’s no risk, because it’s only when investors are suitably risk-averse that prospective returns will incorporate appropriate risk premium."