Date: October 11, 2011
by Rieve Ko, SIAS Research @ October 11th, 2011
We were greeted with more sell-offs as we begin the month of October. Most equity markets globally have now officially fallen into their respective bear territories with the MSCI World Index (MXWO) tumbling a total of 21.54% from its high of 1,397 to 1,096 last Wednesday.
The global meltdown came amidst better than expected U.S. economic data. The Leading Economic Index (LEI) increased 0.3% in August to 116.2, following a 0.6% increase in July. Initial Jobless claims fell by 37,000 to 391,000 in the week ended 24th September while GDP grew an annual rate of 1.3% in the second quarter. Investors were also not cheered on by talks of an increase in the size of the European Financial Stability Facility (EFSF). So, does such a bad start auger further downside over the rest of October?
The month of October has been associated with spectacular stock market crashes such as the great crash of Oct 29, 1929, which helped usher in the Great Depression, the plunge that occurred on Oct 19, 1987, wiping off more than $1 trillion in value over the few weeks that followed and the 2008 October meltdown (Dow skidded almost 30% at one point during that month) sparked by the downfall of Lehman Brothers. The sell-off then continued for several months in each of these instances before the DJIA could find any bottom.
Copper prices – the bellweather for global demand due to it being widely used in a variety of industrial applications – hit 52-week low of $2.99 last Monday. This kind of price action suggests that the global economy could be tipped back into a recession and that another sell-off may possibly be in the horizon. Moreover, since 2002, Copper prices have been moving in near lockstep with the Dow and the S&P500. Hence, a continued downward move in copper prices for the medium-term may mean more downside for equities.
Technical signs are not painting a pretty picture either. After plunging below the supporting region in its Head and Shoulders (HnS) pattern of 11,000 – 11,400, the Dow rebounded again but failed to break above the 11,400 level. The Dow then continued its descend to form a new low of 10,404 as of last Tuesday. Such movement is significant as it indicates the continuation of its downward trend.
Given such a gloomy scenario, we suggest investors carry on maintaining a defensive stance. We continue to like defensive sectors such as the infrastructure and consumer staple sectors, Asian bonds and the Australian money market fund. On the other hand, we continue to underweight on riskier assets such as equities and commodities.