Following the strategic rebalancing we implemented last Monday, we executed tactical risk reduction trades to further lower exposure to risk assets by selling domestic stocks and are now holding significant levels of cash in all our portfolios. Despite extreme levels of pessimism - which we recognize is a contrary , bullish signal - we became worried as the S&P 500 broke down decisively below Its 200-day moving average or 'primary trend' (see chart below) and subsequently failed to break above it. Fundamentally, we think this is because of the European Central Bank's reluctance to take more aggressive measures to allay sovereign debt fears in the Eurozone, combined with evidence of a slowdown in US growth momentum. We believe our caution has been validated by the flight to safety into Treasuries and the US dollar.

David Fuller's view On the one hand, global stock markets did too much technical damage for the April-May decline to be classified as a "healthy correction". On the other hand, investor pessimism rose to levels not seen since March 2009 recently. Extremes of sentiment are usually a contrary indicator because they tell us more about what investors have done, rather than what markets will do.

Last month, I frequently mentioned a triple waterfall of events which had spooked investors: the SEC's indictment of Goldman Sachs; the Greek debt blow-up and Wall Street's temporary meltdown on 6th May, triggered by high-frequency trading. There was also the ongoing concern of China's monetary tightening to curb property speculation and inflation.

However on 25th May, in my last market assessment of the month before going on holiday, I cited The Weekly View's headline for that week: "Pessimism Extreme as Cyclical Bull Threatened". That and the euro's slump prompted my question: "Who are the winners and losers following this currency realignment?" My 5-paragraph answer listed 3 shares which were likely beneficiaries and contained this conclusion on stock markets:

"I suspect we are close in time to a short-term bottom for stock markets. What I do not know and no one can know at this stage, is whether that will be THE bottom."

What can we say today?

Major stock markets have subsequently confirmed lows of at least near-term significance. The most important technical level remains 1040 for the S&P 500 Index (weekly & daily) and it must hold if leading equities are to experience significant additional gains over the short to medium term. Currently, I would give the S&P's chances of holding above those important lows the benefit of the doubt because there have been other encouraging signs in addition to the recent rally.

My lead item on 9th June, mentioned some overstretched trends, including the euro's decline, the US Dollar Index's advance, the rally in US government bond prices and the sell-off in industrial metal prices. The last three of these can be regarded as gauges of investors' fears. Consequently, further retracements of these trends would be an indication of improving confidence. This may take time, especially for the euro which has serious fundamental problems. A soft euro is essential to boost Euroland's export earnings and to cushion deflationary pressures.


For stock market indices the technical evidence has improved during the last few days, with some of the Asian markets reviewed last Thursday among the leaders. While this is encouraging, further sideways ranging may be necessary for most indices before these patterns can support resumptions of last year's uptrends. (See also today's chart review below.)