31 August 2009

Are equity markets due for a correction soon?

For 4 weeks, the Chinese Shanghai Composite Index has been down (-23.2% as of this morning). It was leading on the way up post September 2008 financial crisis, and one may wonder whether it is not showing the way down for other equity markets. All stock markets are well above their 200 days moving average, but the Chinese market that is less than 5% away. This dichotomy cannot carry on for long.

Let's see 2 graphs.

1) Shanghai composite/S&P 500: Whilst both markets peaked at the same time in October 2007, the S&P started to diverge during the first quarter of 2008, the Shanghai Composite having almost no pause in its downward spiral. It then bottomed early October 2008 to peak early July. The Shanghai index has clearly been leading the S&P for +/- 2 years.

2) Shanghai Composite / S&P 500 ratio: This an other way to look at the previous graph, but the ratio makes the comparison more striking. Since early July, the Shanghai composite is under-performing the S&P 500, under-perfomance that accelerated early August.

In the absence of really new good news, this leads me to expect the US market ( an other major markets) to be under pressure in the coming weeks. This pause would be most welcome in a secular bull market that I feel is intact since March 2009.