Weekly Market Review 22 Dec 2018
As our readers know, we have been calling the end of the secular Bull market in equities as early as January 2018 and we had the confirmation of the top in September 2018 when the US equity market peaked.
We were also amongst the very few commentators to call the end of the technology sector leadership as early as March – April 2018.
We were expecting a year-end rally to develop in December and unfold over the first quarter of 2019 before the second leg of the bear market started sometimes in April of 2019.
However, last week’s price action in US equities and Friday’s close in particular delivered a SELL signal that cannot be ignored.
It is always difficult to change one’s strategic tack but managing money is about being disciplined and respecting the signals that are sent by the market.
Two major support levels were broken last week and the fall was relentless.
Indeed, equity markets are oversold in the short term and a bounce is a possibility, but the medium term outlook has been damaged extremely seriously.
Something BIG is taking place, and the remaining downside is significant.
Instead of the orderly bear market with tradable rebounds that we expected until last week, we could very well see a much more violent type of bear market unfolding with sharp sell-offs and very few respites.
Over the past couple of weeks, we have seen extremes in most sentiment indicators that normally lead to significant rebounds, but this time round the expected effects did not materialize.
Indeed, Thursday and Friday were quadruple option-witching days and the volumes and volatility associated with these situations are usually higher than in normal times.
Last week’s -6.61 % fall in the MSCI World equity Index was accompanied by an exceptionally high volume and a surprisingly low variation in the VIX, meaning that investors are still complacent.
Never is the past 70 years, apart from October 2008, did the sentiment indicators deliver the same erroneous signals that have been flashing in the past two weeks.
The risk here is that, as was the case in October 2008, these anomalies signal an extremely sharp move lower even if 20 % had already been made.
The MSCi World Index went through the 23.6% Fibonacci support level
And the SP 500 is testing it while being still far away from the medium and long term moving averages.
The charts indicate without a doubt that, since last week, we have entered a bear market similar to 2008 and 2000 and that this bear market will only end once we will have traded AT or BELOW the moving averages.
Contrary to 2008, there is nothing in the fundamentals, be they economic or corporate earnings, that would justify a violent bear market and a drastic re-rating of equity valuations.
However, Donald Trump’s chaotic presidency and erratic management of international issues is creating an environment of uncertainty that has never been seen before.
We must admit that we did not expect the run that the US – Chinese trade war truce would take with the imprisonment of the CFO of HuaWei in Canada, neither did we expect the departure of Gal. Mattis or the inclination of a President of the USA to revoke the Chairman of the FED.
The US Presidency seems to have gone out of control with very few solid people around a President that has already caused more than 5 trillion of damage to the US equity market since August, for no valid reason apart from a management method that goes against all established codes.
The departure of the Defense Secretary of State is an extremely negative signal to the rest of the world and the alliances on which peace has been built over the past 50 years.
The story in equity markets is very much about US and Western equity markets really falling out of control and a sharp re-rating in technology stocks Nasdaq down ( -8.36 % last week )
( see the charts in the Technology section below )
By contrast, Asian markets are holding up better. However, as can be seen from the charts below, especially the long term ones, there is no point in riding the wave down.
SELL signals must be respected and there will be a time to come back into equities.
The only area that deserves exposure at the moment considering valuations and market controls are China and a few other equity markets in Asia.
We have been out of the USA and North American markets. We are sticking to China, have bailed out of India last week and will exit Vietnam this week, while reducing some positions in Europe.
Equities in Charts
Most major equity indexes delivered significant SELL signal last week from our WATCH rating the previous week. In some cases we show both the weekly and monthly charts for a better picture of the environment.
MXWO – MSCI World Index
MXEF – MSCI Emerging Market Index
MXAP – MSCI Asia Pacific Index
USA – Dow Jones Industrial Index
USA – Standard & Poor’s 500 Index
USA – Nasdaq Index
Canada – TSX Index
Mexico – MEXBOL Index
Brazil – IBOV Index
Japan – Nikkei 225 Index
Japan – Topix Index
Japan – JASDAQ Index
China – FT 50 China Index
China – Shanghai Composite Index
China – CSI 300 Index
China – HSCEI Index
Hong Kong – HSI Index
Taiwan – TWSE Index
Korea – KOSPI Index
Singapore – STI Index
Indonesia – JCI Index
Malaysia – KLCI Index
Thailand – SET Index
Philipines – PCOMP Index
Vietnam – VN Index
India – SENSEX Index
Europe – EUROSTOXX 50 Index
Germany – DAX 30 Index
France – CAC40 Index
Switzerland – SMI Index
UK – FT100 Index
Spain – IBEX 35 Index
Italy – FTSE MIB30 Index
All tech stocks must now be traded on the short side structurally. There is a lot of downside left even if the corporate results for the 4th quarter of 2018 should not be too bad.
The best shorts are Google, Microsoft and Adobe.
AAPL – Apple Inc
GOOG – Google Inc
FB – Facebook Inc.
NFLX – Netflix Inc
ADBE – Adobe Inc.
MSFT – Microsoft Inc.
A lot of volatility in currencies on the back of option and future switching.
The US dollar attempted to turn last week but the fall in equity markets sent the Japanese Yen skyrocketing and the EUR stronger.
Commodity currencies and the Canadian Dollar are falling sharply
DXY – Dollar Index
EUR – Euro
JPY – Japanese Yen
CAD – Canadian Dollar
AUD – Australian Dollar
CNY – Chinese Yuan
Most commodities fell last week with oil losing another 11 % of its value and frankly there is nothing to prevent oil prices to fall further towards 25 – 28 US dollars.
Gold and Silver performed well last week, but not as well as one could have hoped considering the panic in equity markets. Gold needs US dollar weakness and maybe more panic in equities to start flying.