DEVELOPED MARKET EQUITIES Archives | Page 4 of 26

EURO STOXX 50 INDEX

May 7, 2016/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

Euro Stoxx 50 index is either offering a rare buying opportunity similar to 2011 or one last chance for the bulls to exit before the downtrend resumes.

The bearish case suggests that the Euro Stoxx 50 index peaked in April 2015 after completing a 2 year-long head and shoulder top which was followed by the breakdown of the multi-year uptrend (2009-2015). According to this outlook, last few months price action is a pullback to the broken trend line. Pullbacks are usually followed by the continuation of the dominant trend.

Weekly scale chart showing the bearish case

The bullish case suggests that the Euro Stoxx 50 index completed a 2 year-long head and shoulder top but found support at the lower boundary of a long-term trend channel. According to this outlook, last few months price action is a consolidation above trend line support (lower boundary of possible trend channel). Once the index completes the consolidation it can reverse and trend higher.

Weekly scale chart showing the bullish case

Daily scale chart shows the last 3 months consolidation between 2550 and 2900. For the bullish case I will be looking for a breakout above 2900 levels. For the bearish case, a breakdown below 2550-2650 area will signal lower prices for the coming months.

EUROSTOXX 600, MSCI ACWI and MSCI EM

March 6, 2016/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

As we are getting closer to eventful few weeks (thanks to Central Banks), I wanted to review some of the charts that will be important in our decision-making.

For those who trust the validity of long-term trend lines; most of the global equity indices breached +7 year-long upward sloping trend lines. These are major technical breakdowns, not minor violations.

Last few week’s counter-trend moves didn’t reverse the negative technical outlook on the long-term charts. Indices continue to make lower lows and lower highs and breaking down previous reaction low levels.

8-10% rallies can take place in bear markets. For reference I plotted the line chart of the MSCI ALL COUNTRIES WORLD INDEX. Major bear markets over the past two decades show counter-trend moves exceeding 8% in price appreciation. In fact during 2001-2002 bear market MSCI ACWI rebounded from 203 levels to 245 levels, a 20% rally, followed by another 35% drop.

Wide price swings and of course mood swings are characteristics of market correction. Since the beginning of the correction in mid-2015, there has been two counter trend price movements. One has taken the index from 383 levels to 413 levels (7.8%) during September-November 2015 and the other one is ongoing. So far the reaction resulted in 8.8% appreciation from the low of 356 levels.

Line price chart of MSCI ALL COUNTRIES WORLD INDEX with linear scale

Line price chart of EUROSTOXX 600 Index on semi-log scale

Line price chart of MSCI EMERGING MARKETS INDEX on semi-log scale

EURO STOXX 600, NIKKEI and MSCI ACWI

February 13, 2016/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

After reviewing the charts I posted two weeks ago on Euro Stoxx 600 and MSCI ALL COUNTRIES WORLD INDEX, I can conclude that since then there has been more technical damage on global equity indices. Until markets recover above previously broken support levels, we should watch out for further downside in the global equity markets. In other words I’ll treat the current market conditions as a bear market.

Markets seldom move in straight lines. Earlier price action on Euro Stoxx 600 shows how two different bear markets unfolded in 2001 and 2008. 330-340 area will remain as strong resistance. Both the 7 year-long uptrend and the long-term moving average are breached on the downside. Rebounds should be considered as bear market rallies.

Monthly price chart of EURO STOXX 600 INDEX

Weekly price chart of EURO STOXX 600 INDEX

It clearly takes more effort to change the direction of the trend on MSCI ALL COUNTRIES WORLD INDEX when the global equity benchmark includes 23 developed and 23 emerging market equity index performance. So far it has given us a bearish message. 374-400 area will remain as strong long-term resistance. Failure to recover above 374 levels will resume the downtrend.

Monthly price chart of MSCI ALL COUNTRIES WORLD INDEX

Weekly price chart of MSCI ALL COUNTRIES WORLD INDEX

MSCI Emerging markets index is in a clear downtrend. The downtrend can accelerate. Index broke down decade-long trend line support and also the 5 year-long horizontal support at 850 levels. It is usually difficult to reverse momentum after such significant breakdowns.

Monthly price chart of MSCI EMERGING MARKETS INDEX

Sell-off in Japan has been sharp over the past few weeks. Two strong technical supports overlapping at 17,000 levels has been broken on the downside. While we can conclude that in the short-term the market is oversold, it will need a lot of effort for the market to reverse the negative sentiment and recover above 17,000 levels. This market is also suggesting weak performance for the coming months.

Weekly price chart of NIKKEI 225 index

DOW JONES AVERAGES and MSCI ACWI

January 30, 2016/2 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

There are discussions right now if last few week’s sell-off was another failed breakdown. Was this another bear trap? Did Central Banks again manage to put a floor to equity markets? ECB’s dovish comments and BOJ’s negative interest rate moves both came this month, after sharp sell-off in equity markets.

Due to developing bearish chart patterns and the fact that major indices are below their long-term averages I’m weighing the possibility of a correction more than a strong bull market in the coming months. This time could be different and the technical outlook might prove to be a bear trap. I’m fine with that. That’s what markets are. Current chart set-up is something that I can’t ignore and I’ll try to explain here.

First let’s look at two major equity indices that we have been following. On a monthly scale “close” was at the border. The jury is still out in my opinion. Though, I would say last week of the month we have seen a good attempt to close at the higher levels for the month.

Richard W. Schabacker in his book TECHNICAL ANALYSIS AND STOCK MARKET PROFITS (Printed in US in1932) discusses Important Reversal Formations. Under this section there is a detailed study of Head and Shoulder reversal chart patterns. We are all familiar with the Head and Shoulder chart pattern. I want to draw attention to a specific type that we are seeing right now on equity index charts. Schabacker explains:

Here is the chart he was analyzing at the time. Please note that the original chart doesn’t include the red trend line (neckline). I added this to show the similarities with the current chart patterns.

Several decades later similar chart patterns are appearing on the widely followed and traded equity indices. Dow Jones Transportation Index broke down a similar downward sloping trend line. Head and shoulder price target is at 5,800 levels, still far from current 6,906 levels.

Now let’s look at some similarities between 2008 and 2016. In 2008, Dow Jones Industrial Average reversed its 4 year-long uptrend with a Head & Shoulder top. Neckline was downward slanting. After the breakdown there was a pullback that violated the neckline but couldn’t push above the long-term average or inside the trend channel. The head and shoulder top that formed in 2007-2008 showed significant market weakness due to its drooping shoulder.

Dow Jones Composite Average is now forming a similar Head and Shoulder top with downward sloping neckline. Both the long-term moving average and the lower boundary of the 6 year-long trend channel is violated. If this time is not different, current chart set-up suggests a correction is more likely in the following months than the continuation of the bull market.

We can also look at MSCI ALL COUNTRIES WORLD INDEX and compare the top in 2007-2008 with the latest chart development. I think the current technical conditions can’t be ignored. I want to give these markets some more time to prove the bears wrong.

MSCI ACWI, EUROSTOXX and DOW JONES

January 24, 2016/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

Volatility increased in the global equity markets. Last week of January will be important as we get closer to the end of the month. Why the last week of January is important? After the sharp sell-off equities are now trying to rebound. Another week of strength will result in a “close” at the higher end of monthly bars. This is the case for almost all the indices analyzed below. However, a flat or weak market action in the last week of the month will result in a “close” at the lower end of the monthly bars. A long monthly bar with a close at the lower end will confirm sellers willingness to push the markets lower. When there is an increase in volatility, it is always better to step back and look at charts with long-term focus. Preferably one or two higher degree than your usual template. This is one of the reason I’m paying close attention to monthly charts. Daily price movements can be considered “noise” in such highly volatile trading.

If EURO STOXX 600 manages to push above 350 levels, an immediate correction will be negated. However, a weak monthly close below August 2015 low (330) will suggest weakness for the coming months.

MSCI ALL COUNTRIES WORLD INDEX has similar technical outlook. Failure to push above August 2015 low at 374 levels will result in further weakness in the coming months. In order to compare all charts in this update, I added the 3 year simple moving average. You can pick different periods for the long-term average. Having a long-term filter on a chart is better than not having at all. When price is below the long-term average one should be more alert on the possibility of continued correction. In this case it is important to note that price is below several long-term averages.

MSCI ALL COUNTRIES WORLD INDEX

January 9, 2016/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

2016 started with negative performance for global equities. And weak performance can continue in the coming months. Sharp sell-off in Chinese equities mainly driven by a devaluation of the Chinese yuan, resulted in a broad market weakness. Sharp price action is making the headlines as it is one of the few bad starts for the new year in several decades. However, since April 2015 charts have been showing market weakness. (Earlier updates on MSCI ALL COUNTRIES WORLD INDEX here)

Weakness can be seen from the MSCI ALL COUNTRIES WORLD INDEX failing to breakout to new high levels in April 2015. Global equities experienced the first sharp sell-off in August 2015. Last quarter of 2015 was a reaction to August sell-off. Now, it seems like the downward momentum is picking up steam. Index is below its long-term average once again. Breakdown below the September low at 374, can send the index towards 300-350 area. MSCI All Countries World Index captures large and mid cap representation across 23 Developed Markets and 23 Emerging Markets countries. (For more information on MSCI indices) With 2,491 constituents, the index covers approximately 85% of the global investable equity opportunity set.

Europe’s STOXX 600 index has similar deteriorating outlook with the index now testing a 7 year-long trend line support. In April 2015 STOXX 600 reversed from 400 levels for the third time since 2000. Failure to clear 400 during its 3rd test suggests supply is overcoming the demand every time index tests 400 levels. If we see Euro Stoxx 600 breaking down its long-term trend line support, we will expect a larger scale correction towards 300 levels.

Dow Jones Composite index that measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 15 stocks of the Dow Jones Utility Average (DJUA), is also showing weakness with a classic bearish chart pattern; Head and Shoulder Top. Support level for the index is at 5,600 levels. Breakdown below 5,600 can send the Dow Jones Composite Index towards 4,700-5,000 area. (For more information on Head and Shoulder Top chart pattern)

LONG-TERM BOND YIELDS

December 23, 2015/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

First half of 2016 can be a volatile time for developed market bonds. Yields can move higher from current levels. I’m not sure what could be the economic trigger for such price action but charts suggest possible trend periods in the coming months. Here are the charts I will be following in the first quarter of 2016.

After sharp rebounds in the first half of 2015, developed market bond yields moved sideways in the remaining part of the year. Yields failed to test 2015 lows and the consolidation formed flag chart patterns. Flag formation is regarded as a continuation, usually forms halfway through out the price action. Breakout from the flag signals continuation in the direction of the breakout.

While German 10 year government bond yields pulled back in an orderly correction, MACD found support around 0 levels. Breakout from the 6 month-long channel will be confirmed with a weekly MACD buy signal.

Chart pattern on the U.S. 10 year government bond yield is different from its European peers. U.S. yields have been forming a symmetrical triangle. Breakout in either direction will confirm this chart pattern. Resistance is at 2.4 and support at 2.0.

When yields go up, bonds move in the opposite direction. Euro BUND which is the 10 year German government bond, reached an important resistance area with a clear negative divergence on its momentum indicator. When analyzed with the underlying yields, we can conclude that higher interest rates can result in a pullback towards 148 levels.

Another interesting chart that drew my attention is the long-term corporate bond ETF. The chart above shows the Nasdaq listed Vanguard Long-Term Corporate Bond ETF (VCLT.O). Price is now challenging 6 year-long trend support. A decisive breakdown on the weekly scale chart will signal higher yields and lower corporate bond prices. (For more information on the above ETF)

DOW JONES COMPOSITE INDEX

December 20, 2015/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

Dow Jones Averages are price weighted indices, while most of the broad market indices such as S&P 500 and Nasdaq 100 are market-cap weighted. In a price-weighted index higher prices will influence the direction of the average more than lower prices, regardless of the actual size of the company.

Dow Jones Composite Index measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 15 stocks of the Dow Jones Utility Average (DJUA). The Dow Jones 65 Composite, like the three sub-indexes, is price-weighted.

Over the past two years Dow Jones Composite Index has formed a top formation usually regarded as Head & Shoulder. Head and shoulder chart pattern forms after a prolonged uptrend and signals a possible change in trend. Chart pattern is confirmed with the breakdown of the neckline. Similar chart patterns can be seen on some of the constituents of the top US indices. If not in the next few weeks, the first quarter of 2016 we can see some corrective price action on these charts. Confirmation of such price movement will be a decisive break below horizontal support levels (neckline).

SMALL CAPS vs. LARGE CAPS

November 4, 2015/0 Comments/in DEVELOPED MARKET EQUITIES, Uncategorized/by Aksel Kibar

Small caps show relative weakness vs. the large caps when investors move out of riskier/high-beta names and into relatively safe large caps. Opposite can be said during small cap strength vs. large caps.

There are two ways to capture this relationship to understand if there is a possibility of small cap outperformance in the following weeks.

1) Russell 2000 vs DJIA is now testing a 6 year-long trend line support. Until it is broken down, these type of trend lines are expected to resume the current trend. In this case the trend is upwards and the ratio is likely to rebound from the long-term support, resulting in an outperformance for the small caps.

Data Source: Thomson Reuters, Charts created in MetaStock

2) Russell 2000 vs. S&P 500 index is now testing the lower boundary of the horizontal trading range. A rebound from the lower boundary will likely result in an outperforming period for Russell 2000 index versus the S&P 500 index.

Data Source: Thomson Reuters, Charts created in MetaStock

MSCI WORLD MARKETS vs. MSCI EMERGING MARKETS

October 25, 2015/0 Comments/in DEVELOPED MARKET EQUITIES, EMERGING MARKET EQUITIES, Uncategorized/by Aksel Kibar

Central banks across the globe are showing their support for the financial markets by either delaying interest rate hikes or cutting interest rates and showing willingness to increase quantitative easing measures. After the ECB’s dovish comments, Chinese central bank cut interest rates to boost economic growth.

Since 2011, markets are positioned for emerging market weakness and this trend continues to remain intact irrespective of interest rate cuts or additional monetary stimulus by central banks. Emerging markets continue to underperform developed markets as the ratio between MSCI World Markets/MSCI Emerging Markets shows. This trend is likely to continue in the following months.