In the markets, nothing unfolds in a vacuum, so the bottoming out process we are waiting for in stocks might occur in the middle of a housing crash or a default on sovereign bonds by a major economy, writes Ian Murphy of MurphyTrading.com.
When the appropriate time comes to get back into trend following of equities a host of other issues in other sectors will probably be playing out in the background. A cluster of central banks raised interest rates this month and the knock-on effects are starting to be felt in the currency sector. We looked at strong moves in the British pound and Japanese yen on Friday but currencies in developing nations are also under severe pressure, and we only hear about those when a brewing crisis finally comes to a head.
We must remain focused throughout the coming months because the best time to go long equities is often the very time no one wants to buy stocks. They feel there is so much going on that they don’t want to take the risk. Now is the time for us to familiarize ourselves with the signals which confirm the market has bottomed out and prepare to act when those signals occur.
Looking at the Composite and Pessimism indicators from Friday’s session, we see 68.5% of US stocks made a new 20-day low (red line). The previous low from June occurred with only 45.6% of stocks making 20-day lows (circles), so I suspect we will see that low taken out soon.Learn more about Ian Murphy at MurphyTrading.com.