Global Equities , hanging on a clift

• Barely holding on. The MSCI World Equity Index (MWI) is holding just above its
major support trend line after pulling back during the global market rout in the past
fortnight. Weekly MACD and RSI indicators have already caved in, which is
worrying as this is usually an early warning sign of further weakness ahead for
global equity markets in the medium term.
• Critical week ahead. Before last Friday’s sell-off in US equity markets, we were
looking forward to a rebound of global equity markets. But we are not certain now.
If the US market continues to head down over the next few days, it could mean
more downside and volatility for global markets.
• 4-year trough cycle not completed yet. In addition, global stock markets have
not completed their 4-year trough cycle. This could happen in 3Q07 if the sharp
pullback over the past fortnight is any indication of the potential correction ahead
for global markets. The last trough was in Oct 02 when 19% was erased from the
MWI in two months.
• Watch S&P500 at 1,450 and 1,488. After hitting a peak of 1,555 in mid-Jul, the
S&P500 turned south rapidly and fell to 1,433 last Friday, a 7.8% decline. There is now very strong resistance at the 1,450 and 1,488 levels.
• Asia cannot shake off global jitters. Asia ex-Japan equity markets finally cracked
last week after holding out valiantly the week before. The MSCI Asia ex-Japan
Index (MAxJ) is currently trying to find some support at its 50-day SMA of 532 pts.
We believe this level may hold for now but is not sustainable in the medium term.
• Major uptrend is over? Based on our preferred wave count, the MAxJ could have
completed its major “Wave 3” bull run (which started in 1Q03) at 579pts in late Jul.
• Expect a protracted correction. The current correction is not expected to be like
the Feb sell-off which was completed in a fortnight. We believe that this correction
will last no less than 2-3 months if the downtrend is “fast and furious” while a
gradual decline could take 3-6 months, if not longer. A 23.6% of Wave 3’s rally
pegs the MAxJ’s retracement level at 480 while a 38.2% retracement points to 420.
These levels represent 17-27% declines from the Jul 07 top.