Yes, Stocks are Overdue for a Correction
The first trading day of the week was a somewhat dreary affair, not unlike the weather in the Northern hemisphere. Following the Christmas day rate hike in China, most major U.S. stock market indices managed to reverse earlier losses and close in the black, albeit only marginally. However, the Dow Jones Industrial Average bucked the trend and remained in the red in a thinly-traded market.
I yesterday posted an article entitled "Chinese stocks - finely balanced", showing a chart of the Shanghai Composite Index trading above its key 200-day moving average but below the 50-day average. "The Index is also squeezed into a triangle, indicating a point of resolve could be expected over the next week or so," I commented.
We may not have to wait a week: The Shanghai Composite Index is down again this morning by a massive 3.6%, causing considerable technical damage. In addition to breaking trend support, the Index (2,733) has breached its 200-day average (2,779) (not yet shown on the chart). This is a rather ominous picture for Chinese stocks and could also be spelling danger for global stock markets.
Source: StockCharts.com
Regarding the U.S. stock markets (and pretty much most other world bourses), Raymond James's Chief Investment Strategist Jeff Saut summarized the situation as follows: "The Volatility Index (VIX/16.47) is down to the 'complacency levels' seen last April right before a 17% correction. Ditto, Investors Intelligence data shows advisory sentiment approaching the bullish extremes of October 2007. Meanwhile, stock market leadership is narrowing, internal momentum is waning, and every macro sector except Utilities is overbought. Additionally, correlations between various asset classes are decreasing, implying that investors are becoming increasingly selective.
"All of this suggests more caution as we enter the new year. That cautious January strategy is reinforced in a report from Citigroup's technical analyst Tom Fitzpatrick, who chronicles previous dramatic multi-year declines, like we experienced between 2007 - 2008, followed by strong rallies like 2009 - 2010, and what tends to occur in the succeeding January (see table below)."
Saut concluded: "However, don't get too bearish because any correction should be for 'buying' and not for 'selling' because the primary trend remains 'up'. Indeed, last week, for the first time in 22 months, Lowry's Buying Power Index rose above Lowry's Selling Pressure Index confirming the bullish trend. Still, I think the strategy of hedging select stock positions, which have accrued large profits, makes sense in the short/intermediate-term."
Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.
Tweet
Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
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.
Copyright © 2008-2012 Dr Prieur du Plessis
Circle Us