Global Equities Correction: Mean Reversion Coming Soon
Tiho Brkan | Dec 16, 2014 06:51AM ET
Since the last article was written, more selling has occurred in global stocks. This is especially true when all majors are priced in US dollars, as global currencies remain quite weak. The MSCI World Index peaked in June of this year and continues to consolidate. Bears argue that we are witnessing a topping pattern, while bulls argue this is a pause before further upside. The truth is, both bulls and bears are correct. It is just a matter of speaking in the right context.
For example, let us refer to Chart 1. Notice that US equities continue to outperform and have barley fallen since peaking in recent days. On the other hand, European and Japanese stocks (priced in USD) have been struggling for a while. Japanese stocks have done well, but the currency has been awful. Here, it is probably important to buy stocks with a currency hedge.
h3 Chart 1: Global equities are consolidating with GEMs under pressure!/h3In the emerging markets sector, there is just as much variance between the good, the bad and the ugly. India has done very well until recently, while China has outperformed during the recent correction. On the other hand, Brazil and Russia are about to test their March 2009 lows. Due to the currency weakness, Russian stocks are in full blown capitulation. Yesterdays volume spike on the Russian Stocks, MarketVectors TR Russia ETF (NYSE:RSX) was insane. Obviously, these countries are suffering from commodity fall out. Imagine if the economy and currency suffered as much in the US. and the S&P traded at 666, where it was almost 6 years ago…
Finally, I have noticed that the VIX is getting quite high now, as we approach close to 25. Also bonds are outperforming stocks by quite a few standard deviations. Keep an eye on these indicators, because a mean reversion is coming soon.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.