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Bulls v bears: is all the bad news priced into shares?
Are the bears missing a strong buying opportunity or is false optimism bringing the ‘ice age’ closer?
The almost universally bearish sentiment that has held sway in recent months is starting to give way to more bullish noises in some quarters as several indicators point to equities being severely oversold.
Against a backdrop of concerns about the eurozone and slowing growth around the world, markets have fallen sharply over the last three months, wiping out gains made earlier in the year.
The MSCI World index is down -9.79% over the last quarter, while the MSCI Asia Pacific and Europe indices have posted double-digit losses over the same period.
Bad news in the price
But a number of investors are now backing equities with a view that risks are now more skewed to the upside with so much bad news now priced in.
Chris Watling, chief executive and chief market strategist of Longview Economics, is recommending clients ‘start to build overweight equities positions in non-eurozone stocks’.
‘While risks clearly remain, we expect the euro to survive this year, especially if as currently seems likely, the Greek exit does not happen,’ he says.
‘Over and above that, a US policy response to its macro weakness, is increasingly likely and imminent. In order to manage ongoing risks, we recommend a modest overweight at this juncture – with that expected to increase if equity markets weaken considerably from current levels.’
Watling says through May the group’s in-house modelling tools all started to point to ‘buy’, including its short and medium-term asset allocation scoring system, which aggregates around 20 indicators, and its risk aversion monitor.
Indeed, investors have become so bearish that Longview’s monthly risk appetite is at its lowest point in over a decade, equating to a strong buy signal.
‘Global equities are oversold at two standard deviations,’ says Watling. ‘The case for buying equities continues to build.’
Jeffrey Saut, chief investment strategist at Raymond James, points out other technical indicators are also flashing green. He noted that last week the Dow Jones Industrial Average, the S&P 500 and the Nasdaq all fell below their respective 200-day moving averages for the first time in around five months.
‘The bears will be quick to point out this is what happened right before the crashes of 1929 and 1987,’ he says. ‘However, the bullish argument is that over the past 20 years, a break below the 200-day moving average by the S&P 500, after it has stayed above it for three months, has typically led to a rally. And despite the break below my 1,290 pivot point, I can’t shake the feeling that all of this is just part of the bottoming process.’
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