STOCKS: The world economy is healing. However, there remains clear headwinds to the continuation of this healing, such as the emerging market risk-reassessment. Quite clearly, risk is being mispriced at current levels given the economic backdrop and clear pressure upon corporate revenues/ margins/earnings. And, not to mention the contined QE taper glide path.
STRATEGY: The S&P 500 remains above the 160-wma long-term support level at 1444. But, perhaps more importantly, the distance above the 160-wma stands at+23% — down from +28%. If it expands above +30%, then an upside explosion is under way, but under it — then a larger correction is expected to materialize.
WORLD MARKETS ARE MIXED THIS MORNING as the recent decline was halted yesterday in a bout of oversold bottom picking. But the fact of the matter is this is just a respite for the time being, for we are likely to see the US markets breakdown out of their very narrow two-day trading range to fresh new lows in all the major indices. The economic fundamental underpinnings of the market are starting to matter now that tapering is a force to be reckoned with, and these are providing the proverbial one-two punch to the gut of the equity markets. At this point, rallies are being sold, and they are being sold aggressively – and we see no reason from a technical standpoint why this should end at this point as our models are simply not to oversold levels consistent with a buying opportunity. We believe this shall occur in tandem with the major indices testing their longer term 200-day moving averages. Once this occurs, then the pieces will be in place for a rally of unknown scope and duration, but a rally nonetheless. Be prepared.
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