Usu­ally bear mar­kets are most vi­o­lent to­wards the end

Usu­ally bear mar­kets are most vi­o­lent to­wards the end

Financial Mail - Investors Monthly - - Contents - GARTH MACKEN­ZIE www.trader­

The MSCI World In­dex is con­structed of se­cu­ri­ties in 23 de­vel­oped mar­kets and rep­re­sents 85% of the free float ad­justed mar­ket cap­i­tal­i­sa­tion of each. It’s a good rep­re­sen­ta­tion of global de­vel­oped equity mar­kets.

It does not in­clude Emerg­ing Mar­kets. The MSCI World In­dex Fund ETF is an in­vestable way to gain ex­po­sure to this in­dex so it makes sense to an­a­lyse this ETF when look­ing at the MSCI World In­dex. What is clear on the chart of this in­stru­ment is the large head & shoul­der pat­tern over the past two years. This is a ma­jor top­ping for­ma­tion and it comes af­ter a bull mar­ket that be­gan in early 2009 and ran for nearly seven years. The break below the neck­line of the pat­tern val­i­dates the pat­tern and that projects fur­ther down­side. That top­ping pat­tern marks the end of the bull mar­ket and the start of a new bear mar­ket. The break below the US$66 neck­line of the head & shoul­der pat­tern opens a down­side tar­get of $57.

If that tar­get were to be achieved, it would im­ply that world mar­kets will have pulled back 25% from their bull mar­ket highs of May 2015. Given that the world is fac­ing slow­ing global growth and that cen­tral bank in­ter­ven­tion seems to have had a lim­ited ef­fect on the global econ­omy in re­cent years, the fun­da­men­tal pic­ture seems to sup­port the gen­er­ally cau­tious tone on global mar­kets. It looks in­creas­ingly ap­par­ent that global equity mar­kets have en­tered a bear mar­ket that may still have fur­ther down­side for the re­main­der of this year. His­tor­i­cally bear mar­kets have typ­i­cally lasted 18-36 months. If we as­sume the May 2015 peak to have been the start of the cur­rent bear mar­ket, then it sug­gests there is prob­a­bly still some time to go be­fore the bot­tom of the cur­rent bear trend. Usu­ally bear mar­kets are most vi­o­lent to­wards the end. If the VIX chart is any guide, it sug­gests the most vi­o­lent time could still lie ahead of us.

The VIX is the com­monly used name for the CBOE Volatil­ity In­dex. It is a mea­sure of the im­plied volatil­ity of S&P500 in­dex op­tions. It is of­ten re­ferred to as “Wall Street’s fear gauge” as it tends to rise when mar­kets are un­cer­tain or fear­ful, and it falls when mar­kets are com­pla­cent. Spikes in the VIX typ­i­cally oc­cur at times of mar­ket panic. This was ev­i­dent in early 2009 at the peak of the fi­nan­cial cri­sis. The VIX also spiked in May 2010 when the Flash Crash oc­curred on US equity mar­kets and in late 2011 when con­cerns about Greece peaked. Re­cently, VIX spiked in Au­gust 2015 when the Chi­nese stock mar­ket crashed. What is no­table about the tech­ni­cal struc­ture on the VIX chart is the large round­ing bot­tom over the past three years, and the pat­tern of higher lows ev­i­dent on the in­dex since mid-2014. The ris­ing trend for this mea­sure of volatil­ity is in­dica­tive of a mar­ket that is be­com­ing in­creas­ingly ner­vous. A sim­i­lar pat­tern oc­curred at the end of the prior bull mar­ket when VIX be­gan to in­crease af­ter the mar­ket peaked in 2007. There has re­cently been in­creased ev­i­dence of buy­ing in de­fen­sive shares and also gold, which is of­ten viewed as a safe haven as­set in times of un­cer­tainty. Un­usu­ally, gold has been ris­ing even as the US dol­lar has been strength­en­ing. All of this is sug­ges­tive of so called “smart money” po­si­tion­ing it­self de­fen­sively as ner­vous­ness in­creases. Bear mar­kets are usu­ally most vi­o­lent to­wards the end — close to the bot­tom. If the MSCI World In­dex chart and the VIX chart are com­bined, it paints a pic­ture of in­creas­ing con­cern for equity mar­kets. A de­fen­sive ap­proach to mar­kets looks to be pru­dent as we head into 2016.

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