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Stock markets

Posted by jdavis on October 30, 2015

Since the last time I wrote, early September, the stock market has bounced sharply from the major lows of the Summer.  I said that they were likely to bounce.

The proxy for global markets is the S&P 500 - the 500 largest listed US companies.

In Red and White you see the S&P 500.  Bouncing sharply from sizeable falls.  So all is well again?

Not if you look inside the S&P 500.  (500 separate companies and a dozen sectors.)  Two major sectors, namely Biotechnology and Transports are significantly lagging.  That you did not see in the multi year bull market.

The bull market can resume if the S&P rises to new highs and drags most sectors along with it.  If, however, it is locked below early 2015 highs then we may well have reversed to a bear market.

Longer term:

Looks like a flattish top, since the end of 2014.  And the market has risen back to the topping area, as markets often do before confirming a reversal.  There is more risk being invested here than not.  If the market does continue up then you can always buy it back again.  No harm done.  But if you hold and this is the retest of the top.  Then it could go down for a year or two.  Harm done.

Finally, to underscore the risks here, this next chart shows the relationship between the S&P (global stocks) and the Japanese Yen.

They are practically mirrors of each other.  As the Yen falls, the stock market rises.  And vice versa.

And look.  The Yen has stopped falling.  And the S&P has topped rising.

If the Yen rises above the boxed range it is likely global stocks will fall.  It is too early to know what WILL happen.  But, as I say, the risk is there if you are holding a lot of general stocks.

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