Global Stock Markets - Pop 'n Drop

By: Prieur du Plessis | Tue, Aug 18, 2009
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I have written a fair bit over the past few days about the overbought level of most global stock markets and also how China - a leading market on the way up - could be the catalyst for triggering a reversal of fortune. It would seem the expected downward correction is now squarely under way with the MSCI World Index down by 3.4% and the MSCI Emerging Markets Index 5.2% lower since their respective highs of August 13 and August 3.

A summary of the movements of major global stock markets since the recent highs, as well as various other measurement periods, is given in the table below. Interestingly, none of the indices in the table have been able to withstand the downdraught, with the Chinese Shanghai Composite Index (-17.3%) and the Russian Trading System Index (-10.0) leading the way down - in not dissimilar fashion to how these indices blazed a trail to record rally returns of 90.7% and 95.4% respectively.

I have discussed valuation levels and technical sell signals in my recent posts, but another factor that will come into play is seasonality turning negative. Focusing on the S&P 500 Index and the Dow Jones Industrial Index, I have done a short analysis of the historical pattern of monthly returns for these indices from 1957 to mid-2009. The results are summarized in the graph and table below.

Source: Plexus Asset Management (based on data from I-Net Bridge)

If one looks at the average return per month and in which months the most market declines have occurred, it seems as if the months of June, August and September are traditionally bad for stock markets. Although June this year played according to script, with the S&P 500 showing a zero return and the Dow Jones declining by 0.6%, July excelled with 7.4%/8.6% gains. Given the overbought level of markets, it is conceivable that the "bad" months of August and September might conform to the historical pattern. September, specifically, has over time been the month with the lowest average monthly return.

For more about key levels and the most likely short-term direction of the market, Adam Hewison of prepared another of his popular technical analyses. Although this deals with the Nasdag Composite Index, it is equally applicable to the S& P 500. Click here to access the short presentation.

The much-needed correction of the summer rally could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but will be watching closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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