Global Markets and Nasdaq Composite Report -A Correction is always better than the Formation of a new Bubble

Recently the US stock-markets have witnessed significant selling pressure along with other major stock-markets around the globe. According to many analysts, the equity markets are overpriced while according to some others the growth in the US economy and the corporate earnings justifies even higher market values. As concerns the bonds market, US bonds are under pressure too and as the hedge fund manager Leon Cooperman said: “Investors buying bonds right now are playing with dynamite”.

In this analysis, we are going to evaluate what happens next regarding the Global Markets and especially as concerns the Nasdaq Composite. Whatever is the outcome of this analysis don’t panic if you want to exit the market, you will have your chance to do it the right way.

Cash will be king again, it always becomes king at the end

According to one of our past analysis (some months ago) we have mentioned that the current bullish circle of the global capital markets is coming to an end. This forecast was based on both fundamental and technical analysis. In addition, we said, “Cash will be king again, it always becomes king at the end”. Fortunately for some investors and unfortunately for many others this forecast becomes true.

What Happens Next regarding the US and the Global Equity Markets

In order to evaluate the current market conditions and to be able to forecast what happens next, let’s see first some important facts regarding the US stock-markets:

(a) Basic Reasons why the US Stock Markets should go up (↑)

√ The US economy enjoys stable growth and looks stronger than ever before, since 2008

√ Unemployment is declining and income is rising

√ US corporate earnings are stronger and according to some analysts there are a lot of investment opportunities left in the market (for example Goldman Sachs' analyst David Kostin)

» Check Goldman’s Recent Report on S&P here

√ There is still excessive liquidity in the market driven by the almost zero interest rates

(b) Basic Reasons why the US Stock Markets should go down (↓)

X There are extreme returns since 2009 for both Institutional and individual investors

X The US interest rates are close to entering a rising period (as expected to start in early 2015)

X Eurozone faces long-term growth problems and that affects directly the exports of US and Asian companies

X The US dollar becomes stronger and that usually is bad news for US equities. European Central Bank President Mario Draghi said recently “Fiscal action is needed to kickstart the European economy, particularly from those countries that can afford to do so” and then he said “You decide which country this sentence applies to"

X There is serious and increasing political instability in many areas around the globe (Eastern Europe, Middle East) and that adds significant levels of systemic risk in every global equity market

X The falling trend in the energy prices indirectly forecasts future diminishing demand (from energy consuming countries)

X There are a lot of people talking about a technological bubble similar to 1999, based on the extreme valuation of some start-ups

Technical Analysis on Nasdaq Composite using MACD and SMA

In order to basically forecast the Nasdaq Composite course for the upcoming months, we use MACD and a Simple Moving Average (SMA).

□ MACD: Standard Settings (12,26,9)

□ SMA: 34 Periods (Note that there is no standard rule regarding the number of the periods of SMA, use always what fits best using the trial and error method)

Chart: Historic Nasdaq Composite

Technical Analysis Conclusions:

1) First of all we can see that MACD line has reached already its signal line and that means that the upcoming weeks are crucial regarding what happens next. If the MACD line breaks below the signal line, this can be considered as a strong selling signal

2) MACD lines don’t indicate any divergences (neutral signal or else trend continuation)

3) From the other hand, MACD Histogram indicates a strong divergence (selling signal) as you can see in the chart

4) The Nasdaq Composite currently is far away from the price of its SMA (34) periods and that may indicate an overbought market

5) The first target level of a declining Nasdaq Composite is set at the point where it reaches the SMA (34).

Statistics -Forming the Nasdaq Composite Historic Pattern

Below you can find statistical data regarding the Nasdaq Bullish Pattern of the past 25 years:

Forming the Nasdaq Composite Historic Pattern

The above statistics were included in an analysis of TradingCenter.org (April 2013)

 

Chart: Nasdaq Composite Returns vs Dow Industrial Returns

Conclusion Regarding the Upcoming Months and the Global Markets

It seems that a correction in the US and the global equity markets is unavoidable. That may sound bad news for some investors but it is better to witness a normal market correction now than to witness the creation of a new stock-market bubble that may drive the global economy to uncharted areas as it happened in 2008. A strong correction now in the share prices (lasting 6-9 months) can drive the global markets with safety to a new long-term bullish channel lasting many years ahead. There are some good reasons for growth in the next decade driven by the technological advances (mobile economy, 3d printing etc) but as concerns the capital markets, growth can’t and shouldn’t happen without any corrections.

 

■ George Protonotarios, Financial Analyst

for TradingCenter.org, (October, 10th, 2014)