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Does US equity double death cross mean resurrection?

by David Campbell on Nov 23, 2012 at 00:01

Does US equity double death cross mean resurrection?

The Dow Jones Industrial Average is off almost 8% from its September high: many managers and analysts are now calling the market oversold. But could you be catching a falling knife?

Following a stellar run through the summer, as investors added risk in expectation of a further round of quantitative easing, US equity has fizzled and then fallen. After tracking sideways for a month, the last 30 days have seen a near uninterrupted slide from 13,551 on the Dow on 16 October down to 12,542 on 15 November.

The Dow is now in double death cross territory, deep below both its 50 and 200-day moving averages, the first time this has occurred since May and only the sixth time in the last four years.

Apart from the extended period of weakness that occurred in August 2011, all the other occasions were immediately followed by a sharp bounce, which is what some very authoritative voices – some of which have been near perma-bears in recent years – are now calling.

‘We are now detecting signs that US markets in particular are getting a bit oversold and short-term sentiment measures are dipping into oversold territory,’ said Stewart Richardson of RMG Wealth.

‘The correction over the last few weeks has wiped more than 13% off the Nasdaq index, and we expect the market to stabilise ahead of the 2,440 support area.

‘We therefore adopted a bullish position in the Nasdaq on Friday (16 November) looking for a bounce in the next few weeks.

‘There is clearly upside potential for US equities if Washington moves to a sensible fiscal plan in the days/weeks ahead, and with the next Federal Reserve meeting on 12 December, we believe it makes sense to be thinking more positively on US equity markets in the short term.’

Policy overhang

Others pointed to the policy overhang suppressing risk appetite – in particular the year-end deadline for a US fiscal settlement – as factors which would need to be resolved to catalyse market value.

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