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Market Insights: Technical Vulnerability

01/13/2014

This morning I posted a “global risk asset correction watch list” within the “Reflecting Back, Looking Forward” market insight posting. Subsequent to that posting, the S&P 500® Index (SPX) (Figure 1) has declined sharply today and violated 1823.73, the intraday low from January 6 that I suggested investors use as a near-term point of reference.

Therefore, the first variable on the global asset risk correction list, “SPX technical breakdown,” must be updated from “not present” to “present”. Today’s breakdown presents a “vulnerable” technical scenario similar to what unfolded in late May 2013. SPX vulnerability, along with emerging market asset weakness, is not to be dismissed as we head into earnings season. The global risk asset correction watch list now contains two positive conditions, two negative conditions, and one to be determined.

I will be watching Japan very closely this evening and over the next few sessions to determine if the “carry trade” that utilizes the yen as the funding currency begins to unwind. The speculative community is largely allocated to the overall bearish yen and bullish Nikkei trends. If a deeper correction is to unfold, I suspect Japan becomes the near-term focal point.

Global Risk Asset Correction Watch List

  • SPX technical breakdown (PRESENT)
  • Volatility elevation (NOT PRESENT)
  • Emerging market asset weakness (PRESENT)
  • U.S. earnings and profit margin contraction (TBD)
  • Japan, China or European turmoil (NOT PRESENT)

Figure 1: S&P 500 (SPX)

Source: Bloomberg

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