Ever since the financial crisis we have been told by bear after bear that the QE would end in tears, we would all go bust when ultra low interest rates are raised, and that the EU and China were two big accidents waiting to happen.
Then there were the arguments which rested on historical comparisons, valuations being at their most overstretched for decades, bull runs having gone on longer than ever before and more stock being borrowed by (foolish) retail investors since the dawn of time…! And finally, no pundit worth their salt could resist coming up with the best bear signal of all – gut feeling. The line is typically “in all my years of experience, I can just feel that this is the moment for a crash.” Or words to that effect.
Unfortunately, none of these negative theories prevented the U.S. stock market putting in a blistering rally going into last month, with even our dear old FTSE 100 nudging through 6,900 prior to the Scottish Vote. Yet still the doomsters kept telling us we were due a severe correction. My view was and is that while this may be correct one day, the value in such a call is in the timing.
For example we have been told for some 2 years and more that the Euro was set to break up, and precious metals / mining stocks set to rocket, and neither event has yet to happen. Both may happen tomorrow, but as things stand both calls have been the source of considerable pain.
Speaking of the financial crisis, one of the legacies of it was what has fast become a cliché: the Black Swan.
Black Swans are of course defined as unforeseeable negative events, and with the latest Ebola outbreak we appear to have the saviour of the bears. They will clearly try and suggest that they predicted the latest weakness for stocks as investors run for cover – starting off with travel related companies. However, to link previous sell predictions with the first cases of Ebola in the U.S. and Europe would be the equivalent of giving credit to a stopped clock for telling the correct time twice a day.
The question now is whether the Ebola Correction is going to be The Big One as far as ending five years of bullishness, or whether we will look back in a few weeks and simply suggest that this was yet another false sunset move?
Unfortunately, it is actually more difficult to predict the fundamentals at this juncture. How much panic will the disease cause, how disruptive to transport, and business or even everyday life? For instance, sections of the community being put under quarantine could pose all sorts of issues.
Ironically, in terms of the technical prediction game things are rather more clear cut if we are looking at leading equity indices. The benchmark in this respect can be regarded as the S&P 500 where it is evident on the daily chart that the topping out process has already begun in earnest, even if we do not have confirmation.
This is said in the aftermath of last month’s 1,904 floor and recovery. Rather helpfully from a technician’s perspective it can be seen how the 200 day moving average at 1,903 is currently fractionally below the key neckline support. From a charting perspective the rally of this year is a House of Cards which could be undone by as little as an end of day close back below the 200 day line. A decline to April’s floor at 1,830 could then occur within days. Nevertheless, it may still be wise to wait on the August floor being broken, just in case this market – which has already had nine lives, manages to dig itself out of trouble yet again.
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