Equity Markets take a beating

Technology re-rated

Oil is a strategic Short

Bonds have stabilized

Panic selling and capitulation is taking place in equity markets leaving many Asian equity markets, including China, in a position of staging a very strong rally very soon.

US, Japanese and European equities sold off sharply last week as indiscriminate selling and hedging took hold, while Chinese equities closed the week higher and several emerging markets saw selling pressure abate.

We expect a strong year-end rally to start either next week or just after the US mid-term elections on November 6th 2018.

Welcome to the US secular Bear Market and to the Chinese secular Bull Market

Equities

Equity markets took another beating last week as US corporate results were mixed, Technology showed signs of significant fatigue, US GDP slowed to 3.5 % and Donald Trump announced that America would withdraw from the 1987 nuclear accord that marked the end of the Cold War.

Equities have now reached correction levels almost everywhere and the Year-to-date performance of all equity indexes are in the red, making 2018 the first year since the 1970s where cash outperformed 80 % of all asset classes.

October clearly confirms that the 2009-2018 secular bull market in US equities ended on Sept 20 2018 and that global equities peaked on January 26th 2018.

The Chart of the Week

The MSCI WORLD INDEX looked at on a monthly basis shows the significant break down of October after a failed attempt at a new high in September, forming a double top at the end of the third stage of the secular bull market in place since March 2009.

Investors are revaluing the entire equation of monetary conditions, earnings growth potential and valuations and are starting to factor in the fact that these metrics are now all turning.

October’s correction is a reset of expectations but the global conditions, and particularly monetary conditions, are not indicative of a major and sudden plunge just yet.

World Indexes

MXWO – MSCI World Index

A scary weekly chart that clearly confirms the break of the 2016 uptrend and a major change in market psychology. The Index is testing its Long term moving average and te MACD have reached levels that usually preceded significant rebounds.

MXEF – MSCI Emerging Markets Index

Another sharp sell-off in emerging equities after a 28 % fall since January 2018. Emerging markets are clearly oversold and only 4 % away from a very significant support at 900.  ACCUMULATE

MXAP – MSCI Asia Pacific Index

Another scary week in Asian equity markets where indie rimante liquidation took place leaving the index down -4.2 % on the week and -15.6 % year to date.  The index is extremely oversold and 3 % away form the major 140 support level.  ACCUMULATE

Americas

USA – Dow Jones Index

The US Dow Jones is putting is a complex top at the end of its 10 year bull market and closed the week right on the 2016 uptrend line.
24’000 also constitute a significant support.

Being the largest capitalization US equity index, it is only normal that it should resist better than the SP500, Nasdaq and Russell 2000.

We expect a year-end rebound that should start after the Nov 6 mid term elections and will make an attempt a new high.

USA – S&P 500 Index

Last week was the first clear break of the 2016 uptrend in the bellwether SP500 index, confirming that the entire 2009-2018 bull market is now over.
The index is oversold and is close to both its long term moving average and its previous 2018 lows, both constituting significant support levels.
REDUCE ON STRENGTH

USA – Nasdaq Index

Technology stocks are finally breaking down and investors are punishing sharply the tech companies that fail to deliver on promises. The Nasdaq Composite broke the 2016 uptrend and its short term moving average last week, however, 7000 constitute a significant support and Apple Inc’s results next week could provide the catalyst for a rebound.
REDUCE ON STRENGTH

USA – Russell 2000 Index

Us small caps are leading the way down and every support is being broken one after another, the latest being last week’s close below the Long Term moving average. The index is more oversold than at any time since 2010.
AVOID

Canada – TSX Index

Canadian stocks fell sharply last weekend are extremely oversold in the short term. However, the 2018 double top indicates that the entire 2016 bull phase is over.
REDUCE ON STRENGTH

Mexico – MEXBOL Index

Mexican stocks are still within their uptrend and are now trading close to major support at 45’000. As successful rebound form that level would trigger a BUY signal.

Brazil – IBOV Index

Brazilian equities were amongst the very few equity markets to close on a positive note last week as the presidential elections take place today. The far right candidate is largely ahead in the polls and his victory is an almost certainty.

After years of socialism and corruption, the markets are taking positively the return of an ex-army officers with a strong Law-and-Order political platform.  BUY

Europe

Europe – EUROSTOXX 500 Index

Another sharp sell-off last week but the European large cap index has reached the lower boundary of its negative trending channel and is 4 % above the most significant 3000 support level.

Strong European GDP figures to be released this week could provide the catalyst for a sharp rebound in what is otherwise a clear bear trend.

Only a clear break above the 3’500 level would negate the negative bias and indicate the resumption of a bull phase.  ACCUMULATE

Europe – Bloomberg European 500 Index

The larger BE 500 index paints a less drastic picture than the narrower Eurostoxx50, confirming that a lot of the weakness comes form hedge funds and institutional investors have used the future contracts to trade or hedge their European portfolios.

The BE500 closed on a major support line going back to 2014 and should rebound from here.  ACCUMULATE

Germany – DAX Index

German stocks are clearly underperforming the rest of Europe and the rounding top built over 2017 and 2018 confirms that the significant rally that unfolded since 2009 is now over.

The Dax is oversold and should rebound soon, but we may be entering a stage where peripheral European markets will outperform German equities.  HOLD

France – CAC 40 Index

French equities are still holding within the horizontal consolidation range in place since 2017, despite having broken a second time the 2016 uptrend and trading below both moving averages.  A sharp rebond is needed from here but only a clear break above 5’500 would confirm the resumption of the uptrend.   France’s GDP should come stronger than expected this week.
ACCUMULATE ON WEAKNESS

Switzerland – SMI Index

Last week’s close confirmed the relative strength and outperformance of the Swiss equity market. Switzerland still maintains negative interest rates despite inflation way above 1% providing a significant cushion for equities.

A strong rebound and a weekly close above 9’000 would be very bullish for Swiss equities. BUY

UK – FT100 Index

Oops !  Last week’s relative strength of the UK stock market and close at the major 7’000 support while being extremely oversold screams TRADING BUY

Considerable damage has been done to the long term outlook, but as long as the index remains above the 7000 area, the constructive scenario is in place.

Italy – FTSE MIB index

Italian equities are deeply oversold and last week’s less negative rating of Italy’s debt by S&P, which kept Italy’s debt in investment grade rating with negative outlook should provide the catalyst for a bond rally there.
ACCUMULATE ON WEAKNESS

Spain – IBEX 35 Index

Last week’s fall is Spanish equities smacks of a trend-ending capitulation.
The index now trades in a major support zone that constituted the basis of the 2016 rally.  ACCUMULATE

Greece – ASE Index

Greek equities closed the week up in an otherwise dramatic week for global equities.  STRONG BUY

Russia – IMOEX Index

Last week sharp fall in Russian equities smacks of a fail break out to new highs even if the global picture remains constructive. A clear rebound is needed to remain positive on Russian stocks in the face of declining oil prices . WATCH

Turkey – TITANS 20 Index

Turkey’s equities must rebound quickly and confirm a higher low to keep their constructive bias. The 900 strong support is very close and the Turkish Lira should appreciate further.

This week-end’s summit with Russia, France and Germany bodes well for a final peace process in Syria – without the USA – and therefore very positive prospects for a European financed re-construction of Syria that should benefit Turkish corporations and the Turkish economy as a whole. HOLD

Asia

Japan – Nikkei 225 Index

Japan was hardly hit last week as panic set in and hedge funds sold the futures sharply – see the Topix Index below – .

The failed attempt at a new high in September reversed the global positive psychology for Japanese stocks, however sharply negative real rates, strong corporate earnings and the historical visit of Abe to China, shaping up a new Asian order without the USA are all strong structural positives for Japanese equities.

The Nikkei should rebound fr0m the all-important 21000 level that marked both the 2018 previous low and the top of the first leg of the secular bull market that started in 2012.  HOLD

Japan – Topix Index

The larger TOPIX index fared much worse than the Nikkei 225 last week breaking through all the key supports and negating the September break out from the 2018 consolidation triangle.

The different trading patterns when compared to the Nikkei 225 confirms that Future contracts have been used massively for hedging by institutional investors and the break below 1676 accelerated the move down.

1500 should constitute a strong support.  WATCH

Japan – JASDAQ Index

Last week’s sharp sell-of in Japanese smaller capitalization index smacks of indiscriminate liquidation and capitulation after the 21% correction of 2018.  Japanese small caps are entering bear market territory but the MACDs are delivering a different message.  ACCUMULATE ON WEAKNESS

China –   FT50 China Index

Despite all the hype and a marginally weakening Yuan, the large cap FT 50 China index closed the week in positive and move its previous lows.

The MACD BUY signal is confirmed and we expect a sharp rebound ahead, probably after the Nov 6 US mid term elections and the resumption of the Bull market in Chinese equities thereafter.  STRONG BUY

China –  Shanghai Composite Index

There again, the larger Shanghai Composite Index showed positive relative strength closing the week up + 1.89 %.  Expect a very sharp move up once the index breaches its 2018 down trend.  STRONG BUY

China – CSI 300 Index

Chinese equities are clearly bottoming out ans laying the foundation for the beginning of a secular bull market in the months ahead.  Lat week’s positive + 12.9 % performance indicates that Selling pressure has disappeared and that the crucial 3’000 support level is a strong Buying area.  STRONG BUY

China – HSCEI Index

Contrary to its domestic counterparts, the Hong Kong traded Chinese H-shares index closed the week down -1.6 %, illustrating the diverging views of domestic investors. and foreign investors about Chinese equities.

Nevertheless, the H index did not make a new low and the MACDs divergence indicates turning point very soon.   BUY

Hong Kong – Hang Seng Index

Hong Kong shares and particularly its developers are suffering form higher US interest rates and the most overvalued real estate market in the world.

Last week’s sharp fall smacks of a final capitulation at extremely oversold levels and we are nearing a strong accusation zone.  ACCUMULATE

Taiwan –  TWSE Index

Taiwanese shares got hammered again last week and are now extremely oversold. They should bounce strongly soon but the damage inflicted to the bull trend is most significant. TRADING BUY

Korea – KOSPI Index

A final wash-out and indiscriminate selling sent Korean shares tumbling last week and extremely oversold.  The index is now close to a major long term support at 2’000.  STRONG BUY

Singapore –  STI Index

Selling pressure is abating in Singaporean equities after their 18 % fall form their 2018 peak. We are nearing a strong support area and the index is sharply oversold.  ACCUMULATE ON WEAKNESS

Indonesia – JCI Index

Indonesian equities showed relative strength last week falling far less than the major western markets. The Indonesian Rupee has turned and the Jakarta Composite Index is holding above its 2018 lows and vey close to a major long term support at 5’500 .  ACCUMULATE

Malaysia – KLCI Index

Last week’s sharp fall in Malaysian equities did not record a new low and the current rate is one of strong long term support. The configuration remains supportive for now despite the clear lower high formed in September 2018.  WATCH

Thailand – SET Index

The SET index closed above its previous 2018 low and just above the crucial 1600 long-term support area. A rebound form current levels is needed to move into Buying mode. WATCH

Philippines – PCOMP Index

Last week’s mild fall and relative strength did not record a new low and probably confirms a significant bottom for Filipino equities. A rebound form current levels would constitute a strong BUY signal. WATCH

Vietnam – VNINDEX

last week’s sharp fall in Vietnamese stocks testifies of global liquidation and risk-off attitude. The technical configuration is damaged, but the index held above the 2018 low and the long term moving average. A sharp rebound is needed to restore the positive trend. WATCH !

India – Sensex

Indian equities are testing their 2016 uptrend and their Long term average while being the most oversold they have been since 2011. A rebound should take place soon.

Currencies

A turning point may be at hand for the US dollar

DXY – US dollar Index

Last week’s price action in the DXY Index marked a failed attempt at a new high and marked a double top. While holding above the 95 level and the Long term moving average, the momentum is weakening and we would not be surprised to see a period of weakness ahead taking the index towards 92 in the coming weeks.

CNY – Chinese Yuan

China is allowing the Yuan to hiver at current levels while refusing to negotiate with the USA ahead of the Nov 6 mid-term elections.

However, there are clear signs that it refuses to let its currency pass the 7 level and allow a capital flight to develop. ACCUMULATE

EUR USD – Euro against US Dollar

The technical picture of the EURUSD is unclear. The pair made an attempt at 1.13 before closing above 1.14, marking a double top for the US dollar.
A period of strength of the EUR may unfold within the more constructive US dollar framework.  BUY

JPY – Japanese Yen

The Japanese Yen remains on a weakening trend after its bout of risk-off strength. SELL

GBP – British Pound

Last week’s fall in the British Pound is unconvincing and failed to record a new low. However, the technical configuration is neutral and next week’s price action will either see a bounce, in which case the picture will become truly bullish, or see a new low, in which case a new bear phase with a target at 1.20 will have started.

CAD – Canadian Dollar

The Canadian Dollar is neutral. Last week brought it back above the moving averages which are tentatively forming a Golden Cross.

TRY – Turkish Lira

Another strong week for the Turkish Lira which will soon break below the lower boundary of its triangle.  BUY

RUB – Russian Ruble

The ruble weakened last week on the back of weaker oil prices. Although the downtrend is still in place, the MACD are giving a BUY signal. HOLD

Commodities

XAU – Gold Prices

Gold prices were marginally higher last week and remained remarkably subdued considering the volatile context of equities. We may be seeing a countertrend rally within the bear market that started in March 2018.

The MACDs are delivering a clear BUY signal.  TRADING BUY

XAG – Silver

Silver’s momentum is weak and although the metal is holding above its long term support and the MACDs are delivering a BUY signal, there seems to be no thrust for stronger advances.

HG1 – Copper

Although te MACDs are confirming the BUY signal, Copper finds it difficult to move back above its moving averages and the short term one is turning down, confirming the temporary bear phase.  From a longer term perspective, Copper is consolidating its 2016 advance.  Neutral 

XPD – Palladium

Last week’s reversal and failure to sustain a new high indicates a temporary  top in Palladium. TRADING SELL

XPT – Platinum

Platinum is building a long term base after its multi-year bear market. The support at 800 is holding up for now but the metal is lacking momentum for a stronger advance. ACCUMULATE

CL1 – Oil

Oil fall another 3 % last week and closed below its 2017 uptrend and its short term moving average. Supply is plentiful and even the drying up of Iranian oil supply as US sanctions come into effect on November 4th will not be sufficient to sustain the artificially elevated prices of Oil  now that Saudi Arabia is no longer in a position to counter US demands for lower oil prices.

The longer term chart of Oil shows that the entire 2016 -2018 countertrend rally is over . STRATEGIC SELL

LB1 – Lumber

Down and down and down. We had timed the top in Lumber to the day in April 2018 and prices have now fallen 50 % as NAFTA was re-instated and housing is weakening in the USA. The entire 2017 – 2018 rally has been erased and Lumber is extremely oversold.   TRADING BUY

KC1 – Coffee

The rally in coffee prices is still powering ahead and the trend is up for now.

SB1 – Sugar

Sugar is overbought short term and a pull back should take place soon, providing an opportunity to enter the market for this who have missed it. BUY ON WEAKNESS

Bonds

USA – 10 year Government Bonds

US bond yields have peaked for now and the combination of slower GDP growth, lower oil prices and falling equity markets should keep a lid on inflation in the months to come.   Bond yields should trade sideways around the 3 % level for a while. NEUTRAL

USA – 30 Year bond yields

30 year bond yields should fall marginally towards 3.20 in the coming months. NEUTRAL