Commodity / mining stocks: The AUDUSD has been down since late Feb 2012 and on average, when my indicator showed that a correction is imminent, the downturn lasts for 150 days, that is 5 months! However, whenever the technical indicators show a correction, the period can last for ast short as 45 (Jun 08 to Aug 08 when there a sell down followed by a dead cat bounce just before Lehman Brothers collapsed), to as long as for 217 days (Mar 11 to Oct 11, the Euro crisis). It's still heading down due to the very weak China data and I suspect mining stocks will have at least a month to two to go before it recovers. The "Sell in May and Go Away" saying works in this case. We are in bear territory for commodities and if you're in profit, you should sell. However, if you are in losses, you should stay because the OECD Leading Indicators are turning up.
High Yield Credit Spreads: High Yield bonds went negative in late March and it looked as if it may recover soon. However, I mentioned in my earlier posts to wait for a confirmation because we rather act later not sooner. It is still in negative territory so I'd rather wait for a longer period. It could be in June before I act. Again the Sell in May and Go Away saying may have worked for this round. Interestingly, credit spreads have tightened again recently and I wonder if the spreads precedes stocks. The HY blended spreads tightened from 458 bps to 431 bps, around 5%.
S&P500: US stocks have generally just entered into a correction territory in early April and I suspect the correction may last a little longer.
Asia ex Japan: Interestingly, MSCI Asia ex Japan and Emerging Markets continued to stay positive. Probably because they have not recovered as much as S&P500 in the last rebound. But after last Friday night's sell down, it may have also entered into a correction.
It remains to be seen if stock markets will repeat what happened in 2010 and 2011, i.e. stocks corrected deeply in May before rebounding in the second half. In the last 2 years, some kind of quantitative action from the Fed and ECB rescued stock markets. It is entirely possible that stocks will once again be rescued by a QE especially when the US inflation expectation is dropping to 2.22%. Once it falls below 2%, believe me, the word, "QE" will be bandied about by the Fed. Once it drops to 1.6% QE3 will occur.
Every time technical indicators turn south, the average correction is around 5.5%. So far, the MSCI World has corrected by around 2.1% and I dare say if this is just an "average" correction, it is around 1/3 of the way through. However, nothing is average in life. When it rains, it pours. It has fallen by 19.5% between Sep 08 and Jan 09. It has also been wrong as the MSCI World rose by 5.3% between Feb and Apr 07.
Look at the 10 year US inflation breakeven expectations. Everytime it falls near 1.6% QE occurs. Deflation is a bigger devil to central bankers than inflation. Same goes for Australia. The CPI YOY fell to 1.6% and the RBA slashed 50 bps to the surprise of investors. The Eurozone is in a stickier situation as its inflatio is at 2.6%. It will be a while before the ECB can act decisively.
So hang on tight. Don't do anything, or if you have already shorted some markets, good on you. I'm shorting gold, and mining stocks. I'm long Asia ex Japan and emerging market stocks in a small manner.
