THE CORRECTION IS NOT OVER, THE BEAR MARKET HAS STARTED
In our post SELL !!! dated January 11th, we warned about the current correction and the making of a major top of the 2008 -2018 bull market in the US.
Last Friday’s sell-off and its severe continuation on Monday confirmed our views and we believe that a major top is now made, but the current correction may not be over, despite the sharp reversal yesterday.
As expected, it was the sharp acceleration in US wages published last Thursday that triggered a sell-off in bonds which in turn sent equity markets roiling.
Timing a top or its likelihood is paramount and as can be seen from the table below, most equity markets have now given back all their January performances, testifying of the violence of the correction.
Our Model Portfolio benefitted from the correction and actually added 2.26 % in the past few days, thanks to our hedges, our stop losses, and the collapse in Bitcoins. We covered half our position at 6050 yesterday morning, and will short again later.
When it comes to the markets in general, we see more downside this week and would wait for a solid bottom to be in place before trying to bottom fish in the markets.
Yesterday up reaction was a natural reaction, as short sellers and hedgers have taken some profits, but the market psychology has now been severely dented, and the advance we expect to take place in March 2018 will probably fail at making new highs.
At best, equity markets will record a lower high that will confirm that we are entering the first phase of the bear market.
A serous look a the charts below shows that there may be some more downside and that some important technical levels will be tested in the coming few days.
The MSCI Emerging Markets Index should test 1147 before rebounding. A Break of that level and of the uptrend that has been in place for the past 2 years would be a bad sign, but we do not expect it to happen just now.
The MSCI WORLD EQUITY INDEX is also attempting to find a bottom on its 100 day moving average. A bottoming out process is needed before re-entering and we see the upside as limited to probably 2138.
The SP500 Index has not yet run the full course of its correction. Once again, yesterday sharp reversal is only a natural process, but many investors who failed to sell ahead of the correction will take advantage of any rebound to reduce risks and protect their performances.
Chinese Shares are the most telling. The FTSE China 50 already recorded a higher low and sold off sharply today, pointing to further weakness ahead. Within this market, solid state owned companies are to be privileged as the Chinese Government will not allow a full blown correction to happen.
Another interesting feature of Monday and Tuesday’s equity sell-of has been the spectacular rise on the volatility index, as massive amounts of volatility short selling were suddenly unwound.
As can be seen in the chart below the VIX index jumped to 50, from its exceptional low levels of 9, as houses like CREDIT SUISSE faced massive losses on billions of US Dollars were invested on short selling volatility. We took advantage of the spike to bail to of or VXX US Volatility instruments.
However, all in not bad in the current environment and we shall take a cautious but determined approach of re-building positions in Japanese equities in the coming weeks.
We are of the view that the US Dollar has bottomed out ( see charts below ) and a resumption of the Japanese yen weakness should support the next leg of structural advance of the Japanese stock market.
Originally published at Mechelany Advisors.
