Summary:Can we draw a parallel with 2007 stock high? Wednesday, 26 November 2014 - In the US, we foresee the downward pressure on stock prices ultimately increasing, primarily due to more speculation of a tighter Fed policy.Technical warning signs have, for some time, been indicating that the bull market is on its last legs.A fall in the S&P 500 Index below 1,820 would provide confirmation of a bear market. - Despite the looser ECB policy, in Europe we expect lasting low growth and, in our view, stock prices in this region remain susceptible to new falls.Nevertheless, we cannot rule out the possibility of stock prices rising to new all-time highs (DAX 30 above 10,050). - We are slightly positive on Japanese stocks, even though we expect stocks in this region to first fall in the event of a (temporary) risk-off climate. Can we draw a parallel with 2007 stock high? US Description: ecrresearch/responsive_reports/images/image0011456.png Description: ecrresearch/responsive_reports/images/image0028861.png The S&P 500, Down Jones Industrials and Transportations indices continue to set new records, while the Nasdaq Composite has reached its highest level in 14 years (the all-time high during the 2000 Internet bubble was just 7% higher) – see graphs 1 and 2. Given the steep price rises over the past few quarters, the question is how much upside potential remains. Description: ecrresearch/responsive_reports/images/image0034833.png Description: ecrresearch/responsive_reports/images/image0046814.png As long as surplus liquidities (which are still being created by the central banks) flow largely to the stock market in the search for yield, then the end of the current bull market is probably still not yet in sight. Furthermore, we envisage the US economy continuing to grow at a fairly high pace for the time being and that growth and US stock prices being further bolstered by lower commodity prices (this is positive for US consumer purchasing power) and the inflow of capital to the US. Although large caps – which achieve a large proportion of their turnover and profits outside the US – are especially suffering from a stronger dollar, from a historical point of view there is a clear trend to be seen in which US stocks outperform the rest of the world when the US dollar strengthens (see graph 3). Moreover, as we already mentioned last week, historically, performance in the month of December often proves positive (see graph 4). From that point of view, a further rise in US stock prices would not be surprising. Description: ecrresearch/responsive_reports/images/image0054254.png Description: ecrresearch/responsive_reports/images/image0066219.png The S&P 500 Index is, however, virtually at the upper edge of an already rising trend channel (read strong resistance at just above 2,100), overbought conditions have more or less been reached and the drop in the Put/Call ratio indicates topping out (see graphs 5 and 6). Description: ecrresearch/responsive_reports/images/image0079339.png Description: ecrresearch/responsive_reports/images/image0083533.png Numerous warning signals we mentioned earlier also persist. Various market breadth indicators show that the rise in the US over the past few quarters has only been supported by a limited number of heavyweights. For months already, the extremely broad Nasdaq Composite Index, for example, has been seriously underperforming in relation to the Nasdaq 100 Index (which contains only the 100 biggest companies from the Composite Index) – see graph 7. This is a sign of underlying weakness. The increasingly limited number of stocks within the S&P 500 Index moving above the 200-day moving average also reflects deteriorating market breadth (see graph 8). These developments are therefore, in our view, hard to reconcile with a continuing healthy bull market. Description: ecrresearch/responsive_reports/images/image0091877.png Description: ecrresearch/responsive_reports/images/image0103740.png The underperformance of the Russell 2000 Index (small caps) - which is considered to be riskier - in relation to the S&P 500 Index (large caps) also continues (see graph 9). This shift could, in our view, herald a switch to a prolonged risk-off climate. Underperformance in the more offensive small caps in relation to the broad market also, for example, preceded a major high in 2007 (see graph 9). Outside the stock markets, too, there are perceptible shifts towards less risk. High-yield bonds have depreciated recently (and their yields have risen), whereas the price of safe US Treasuries has risen. We also saw this widening of credit spreads (see graph 10) – with stock indices nevertheless setting new all-time highs – on the eve of the major high in 2007 and it is an ominous sign. Taking the above into account, we feel there is an extremely high chance of an imminent trend reversal to negative (and the beginning of a bear market). In concrete terms, a fall in the S&P 500 Index below the latest low at 1,820 would provide confirmation. From a fundamental point of view, too, over the next few months we anticipate a trend reversal or, at least, a strong downward correction (also see our recent Stocks and Global Financial Markets reports). Finally, there is also a chance of a blow-off (buying climax), with stock prices first rising even more sharply (and the dominant positive sentiment becoming euphoric) before turning, but we feel this alternative scenario is less likely. Europe The ECB is hinting steadily more heavily that if economic data do not soon improve then it will shortly loosen monetary policy further. As most analysts do not expect the growth outlook to improve in the near future, in their eyes it goes without saying that the ECB will start large-scale quantitative easing, either next week or in January. Due to the positive effect of the cheaper euro, the lower commodity prices and a cautious recovery in credit activity, though, we foresee economic growth in the EMU picking up slightly in the coming months. We do not, therefore, think that the ECB will start large-scale quantitative easing before the beginning of next year and, in our view, the central bank will do less than investors are currently counting on (in view of the strong rally in European stocks since mid October). Description: ecrresearch/responsive_reports/images/image0112530.png Although chart-technically a re-test of the all-time high in the German DAX 300 at 10,050 is highly likely, the steep price rises over the past few weeks have caused seriously overbought conditions. In the short term, therefore, we can first expect a price correction or a sideways consolidation. The same picture applies to the Eurostoxx 50 Index. Finally, the outlook for the longer term remains that as long as there are not more structural reforms, growth will be just high enough to prevent deflation. For some time to come, therefore, the ECB will remain under pressure to come up with extra stimuli. In this climate, we foresee mounting tensions between the EMU countries. We feel that European stocks will perform no better than US stocks in the coming months, either, and will remain under downward pressure, on balance. Japan With the combination of an extremely loose monetary policy, a weaker yen, the domestic rotation from bonds to stocks and the attractive valuations (even in comparison with Europe), we feel the Nikkei 225 Index will rise towards 18,500, in the long run. Moreover, Japanese companies are showing double-figure profits growth. If the atmosphere in the financial markets switches to risk off in the next few months, though, then we also envisage the Nikkei 225 Index coming under downward pressure, on balance. Chart-technical Analysis Description: ecrresearch/responsive_reports/images/image0092082.jpg S&P 500 Index: No change. The wave structure indicates that the rise since 2009 is (as good as) complete. In view of the recent all-time highs, it appears that only a 5th and final wave within wave C has not yet been set. Given the major trend reversal to falling that we can expect to follow, though, the remaining upside potential would appear to be highly limited in relation to the downside risk. Description: ecrresearch/responsive_reports/images/image00368.jpg Euro Stoxx 50 Index: No change. The wave structure of the recovery since 2009 indicates an ABC zigzag pattern, in which the June high at 3,325 probably completed the 5th wave within this C wave. Much lower prices are therefore in the offing. Description: ecrresearch/responsive_reports/images/image0022996.jpg
Posted on: Sat, 29 Nov 2014 10:59:49 +0000
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