2009, Global Sell-Off Coming?

May 5, 2009 · Posted in Weekly Posts · Comment

US stock markets paused in their melt up today and gave up some ground. This is not unexpected after yesterday’s rise. For a correction, it was very mild though we admit to some heart stopping moments this morning when FEED dropped through $4.00. We held all of our positions though and the market ended up closer to even by the close. Our take is that we are headed higher but we believe we are getting to a decision point that could presage the first significant retrenchment of this rally. How the US and world markets weather that retrenchment will say a lot about the months ahead.

We are going to look at the S&P, the Brazilian Bovespa, and the Shanghai Index. What we are going to point out is that the S&P is heading to a point in the next few days where both a line of major resistance and the 200 day MA will be reached. That is coincident with the Bovespa entering an area of major overhead resistance and the Shanghai index seeing its RSI oscillator head over a 70 reading. Taken together, we believe that there is a strong likelihood that we will see a global sell-off when all of those factors come together simultaneously.

Let’s take a look at the S&P first. As you can see we are rising rapidly towards the 200 day MA and towards the resistane level set early in January. This market has not had even a solid 5% correction since it started its rise in march. Despite all the glimmers of good news lately, we are still in a dicey economic and financial situation in the US and it is not going to get any better quickly. Many policy makers have stated that the worse may still be ahead of us. So, purely form a market anticipating standpoint, the confluence of the 200 day MA and the overhead resistance argue for investors to be very careful in the next week or so. This is the point where we would likely see a sell0off of 5% - 15%. If the sell-off is orderly and we see solid dip buying, little panic, and a continuation of the improving news background, then the market may rally again off of the correction lows. If however, this correction turns into a rout, then we would have the evidence that the bear has much much longer to prowl.

S&P 05/05/2009

Now we will look at the Bovespa and the Shanghai index. We are doing this because the news is indicating that Brazil is seeing significant commodity export growth, China, which buys from Brazil, is seeing their manufacturing surveys now enter the “expansion” range and inter-Asian trade is definitely expanding as well. These two nations are the bell-weathers for the global developing world. Looking at their indexes and we see that both of them can be expected to enter a region where a correction is likely at the same time that the US markets correct. This is important because how these indexes react to that correction, and more importantly, how they come out of that correction, is critical. As readers know we have taken profits in a number of names lately and stated, in our Members Only commodity reviews that we were uncomfortable with the miners and the commodity charts at this juncture. This next correction should provide the evidence and the chart behavior necessary to re-reestablish positions with a long term view. This is true not only for equities but for the commodity ETNs as well. A global equity sell-off will take commodities down as well as the traders will interpretet the equity price slide as a caution on the global economy and will sell off the commodities. Everything is tied together. That is why this conjunction of markets and resistance levels is so critical at this time.

Anyway, here is the Bovespa. As you can see the index is entering a region where there are three lines of resistance, as defined by three rally attempts on the way down. These resistance lines should be encountered over the next week or so (indeed the first one has been breached). The Bovespa has not had a solid correction for some time.

Stocks such as VALE (old symbol RIO, new symbol VALE), Petrobras (PBR), Sadia (SDA), Cosan (CZZ) and others will get hit when this corrects. If we see a standard kind of correction and not a panic, then we should be afforded a good buying opportunity. Note that Brazil posting soild commodity export numbers is a no-fooling sign of improvement in Asia. This is not a green shoot, this is a tree. This is a real - “reach out and touch it” kind of economic number, not some stress test result.

Bovespa 05/05/2009

Now let’s look at Shanghai. We see Shanghai has been on a tear and the RSI is again heading into the 70+ range where the index has corrected each time. And when could we expect it to get there? About the same time the S&P and the Bovespa run into heavy resistance. As with Brazil, this should afford us an opportunity to re-establish our SINOPEC position (SHI) among others. We may or may not still own FEED depending on how the stock behaves prior to the correction. Most likely we will sell and re-buy.

Shanghai Stock Exchange 05/05/2009

The key issue is whether these indexes respond to a correction in the same manner. As you will recall, there was essentially zero decoupling between major markets during the downturn. We believe that there is a good chance that we will see decoupling on the way back up. If that comes to pass then we will see different responses from Brazil and China to a correction, especially at the bottom, than we do with the S&P.

Finally, as a backdrop to all this we will look at the dollar. Readers will recall that we stated a week or so ago that were the dollar to fall below 84 on the USD index we could expect to see further falls. We have now passed that point. The next resistance would be at the 200 day MA and …yes, it looks like that will get tested around the time that the global equity markets correct. As risk tolerance rises globally, we will see more money flow out of US dollar assets (though we may see a rise when the markets correct). The US dollar’s reaction to a global market correction and especially to the bottom and recovery from such a correction will be critical to watch. If we have clear evidence of decoupling, with foreign markets responding better than ours, then look for US dollar weakness to accelerate.

US Dollar Index 05/05/2009

Tomorrow we will publish a Members Only post on gold and silver and one looking at some key mining and petrochemical stocks as well as the underlying commodities with an eye towards what to look for during this upcoming correction.

As of 05/05/2009 we are holding:

Long Sadia (Brazilian meat packer) SDA

Long Australian Iron Ore Supplies to China through Fortescue FSUMF

Long AgFeed Inc FEED

The following posts are relevant:

How the US Dollar Will Lose Reserve Status

Commodities Update 04/30/2009

Chinese Gold British Debt

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

Commodities

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

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