More to Asia than China

07/12/2010 12:01 am EST

Focus: GLOBAL

David Fuller

Global Strategist and Producer, Fullermoney

Stocks in India, Australia, and Indonesia have held up well during the spring correction, hinting at further gains, writes David Fuller of Fullermoney.

Behaviorists among you may recall a plethora of bearish forecasts when markets become oversold just as bullish extrapolations often occur following strong rallies. A forecast which I do take seriously is Ralph Acampora's suggestion that the market could drop another 10% to 15%, probably until September or October, before resuming another "meaningful rally."

I am not forecasting a decline of that magnitude, because short-term indicators [had been] deeply oversold.

[Last week’s] rebound in most of the previously weak OECD (Organisation for Economic Cooperation and Development) country stock markets may be due more to short covering than investment demand.

If this remains the case, the rally will struggle to last more than a week or two. However, if bargain hunters are returning to the stock market and if others holding cash are drawn in by upward momentum, then we could be seeing an important bottom.

I am not ruling out this best-case scenario, because valuations are reasonably attractive once again. However, investor confidence has taken a knock and there is also plenty to worry about, which brings me back to Ralph Acampora's forecast mentioned above.

The overhanging top formations evident on index charts for the USA and most European stock markets have the potential to push equities lower during this period of seasonal underperformance if [last week’s] oversold bounce does not gain traction.

Meanwhile, I am gratified that some Fullermoney themes have remained very firm recently despite Wall Street's significant correction. Australia’s index recorded an upside key day reversal after testing its May reaction low. Consequently a close beneath 4180 is now required to offset [the] current scope for a technical rally and instead, reaffirm the down trend. An eventual push back above the June high near 4620 is the minimum required to signal that demand has regained the upper hand beyond a temporary bounce.

Japan’s Nikkei 225 also registered an upside key day reversal Tuesday near lateral trading in the 9000 region. This indicates scope for some additional near-term recovery, but a close above the June high near 10,260 would be required to reaffirm underlying support and negate the downward bias since April.

Indonesia’s JCI has paused just beneath its April-May highs and the psychological 3000 level. A sustained break above that level would reaffirm the overall upward bias.

India’s Sensex tested its April high before drifting slightly lower during Wall Street's renewed correction. A break in the gradual progression of higher reaction lows evident since October is required to turn this into a probable top area rather than a slow build-up of support before a resumption of the overall upward trend. India's Bombay Banks Index remains a relative outperformer.

This relative strength against the background of both Wall Street's and China's recent stock market weakness is remarkable and also matched by some of South America's stock markets. I think it would be premature to assume that the pipedream of decoupling had finally arrived for global stock markets, but it is probably a good indication as to what will lead in the next significant up turn for equities.

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