Equity markets are oversold across a number of technical indicators. The extent of the condition varies according to the indicator but overall it suggests that the downside for markets is limited from here and that a rebound is due - one with a bit more energy than last month's feeble effort. The obverse, or flip side of this, is worth noting, namely that the US Treasury market is overbought. A bout of profit-taking should thus lead to some rotation back into equities.

The FTSE All-World Index is down nearly 15 percent from this year's April peak. As the chart above shows, this has enhanced the valuation for equity markets, as measured by the bond-equity earnings yield ratio and using as the comparator the yield on US Treasuries. However, as the top chart on the next page shows, the bond-equity earnings yield ratio, using as the comparator the yield on US dollar 'investment-grade' corporate bonds, is at its lowest for over two decades. On this metric the valuation for equity markets is seriously compelling.

But you have to believe the earnings story in which the top line is now complimenting the cost cutting and restructuring effort that has been feeding through to the bottom line. As the lower chart on the next page indicates, the recovery has been surprisingly strong - just look at that climb - and in our view, unsustainably so. In recent weeks the earnings revisions ratio (red line) has fallen back as fewer companies have seen their mean earnings estimates revised up and more companies have seen their mean earnings estimates revised down. However, this is partly what the correction in equity markets has been about.

David Fuller's view Don't miss the graphs in this report, particularly the third one. My own comments on stock markets appear below.