Stronger signs of a coming major correction

November 1st, 2009

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In this market rally since March 2009, the strongest correction so far happened in June 2009. Since then, there has been no major falls. But now, we are witnessing signs of the beginning of another major correction, with increase in volatility very likely. As Marc Faber wrote in his latest market commentrary,

As I said, I doubt we shall see new market lows [i.e. the low of March 2009] but a 20% correction from the 1101 peak for the S&P 500 on October 21, 2009 should not be ruled out.

We believe that some signs of a major correction in the financial markets are showing up:

NYSE Bullish Percent Index

NYSE Bullish Percent Index

  • As our friends in Market Club showed in Video: Has the S&P Index Topped Out for the Year?, there are technical signs that the S&P 500 are making a major top and a correction is under-way.
  • As we wrote in Will August 2009 be the top for the year in China?, we expressed our opinion that August 2009 will be top in the Chinese stock market. Up till today, the Chinese stock market has failed to exceed its August 4 high. The Chinese stock market can be seen as a leading indicator for the rest of the world’s market.
Shanghai Stock Exchange Composite Index

Shanghai Stock Exchange Composite Index

  • The down-trend in the US dollar is getting weaker. The implication for the Aussie dollar is, as Marc Faber wrote in his latest commentary,

Finally a rebound in the US dollar seems to be underway [see Currency crisis ahead? Part 1- Potential short squeeze on the US dollar], which is consistent with weak asset markets as I have explained in the past on numerous occasions. Particularly vulnerable would seem to be commodities related currencies.

Commodity prices (including gold prices) in US dollar terms may be vulnerable. If gold cannot hold above the US$1000 line, then there is likely to be further weakness ahead, possibly to around US$800 to US$900. Should gold prices fall to such a low level, then we will be reading about symptoms of deflation in the newspapers.

Regardless of whether you believe that the March to October up-trend is a bear market rally or part of a new bull market (in nominal terms), it is time to get defensive.