Loss of momentum in equity markets – where next?

By Mike Lenhoff 10:17 4- Nov -2009

Equity markets - taking the FTSE All-World Index in local currency terms - are down by some 5 percent from their recent October peak.

Whether this drop is simply a long overdue bout of profit-taking or the start of something more serious remains to be seen. Which of the two it is will be determined by the quality of the rebound from any oversold condition.

If buyers are waiting to come in, then we should see a fairly spirited rally considering that the sectors that have been leading the upswing since the March lows, like the financials and the cyclicals, are down by between 5 and 10 percent. And if they don’t ... well let’s see.

The good news is that neither of the upward trends for the FTSE 100 and the FTSEurofirst has broken down. Neither, for that matter, has the Dow Jones Industrials Index. The bad news is that those for the S&P 500 and the Nasdaq Composite have. The upward trend for the Dow Jones Transportation Index - that old chestnut - has also broken down despite receiving something of a boost yesterday on Warren Buffet’s big purchase of the US rail operator Burlington Northern Santa Fe. I would have thought that the S&P 500 and the NASDAQ are critical for gauging where things are at and where they are likely to go.

In recent notes I have drawn attention to the markets’ loss of sector leadership and suggested that this could be a cue for a correction or consolidation phase without specifying how this might develop. If we’re talking about a correction, I would have thought we’re talking about something in excess of 5 percent.

However, a few of my technical indicators are registering an oversold condition for the UK equity market (chart on next page) and, on that basis, we should see a rebound. But whether it will acquire the energy to re-establish the momentum that the markets are losing is down to the Fed and its message to date that a change in policy is still some way in the distant future. Or not!