Despite the strong gains recorded by equities across the world, most global benchmarks are still some way away from their previous peaks. The MSCI World index is positioned exactly half-way up the decline that ensued after the sub-prime crisis. This implies that while there can be a little more upside in the initial part of 2010, the risk of the third leg of the downtrend unfolding in 2010 persists.
Many of the developed market benchmarks including the Dow Jones Industrial Average and the S&P 500 are also positioned at the 50 per cent retracement mark. It needs to be recalled that the in 1930 Dow retraced 53 per cent of the slide recorded in the previous year. But once this rebound ended, the Dow fell relentlessly losing more than 80 per cent from the peak of its counter-trend up-move.
A perusal of the leading global benchmarks reveals that most of them are yet to get past the critical 61.8 per cent retracement mark or are struggling to break free from here. Many European benchmarks and even the Shanghai Composite Index of China have retraced only 38.2 per cent of their previous fall. These retracement levels imply that it can not be concluded with certainty that the bear market has ended and the rally of 2009 can still turn out to be a counter-trend up move in a protracted structural down trend.
It also needs to be borne in mind that there has not been a significant correction in most indices since March last year and a 3-wave formation is currently drawing to a close in most charts.
The situation is a little more secure for Sensex and some of the benchmarks of Latin American countries that are well above the 61.8 per cent retracement level or are above or close to their all-time highs. Resumption of the bear market in other markets will drag these indices down, but the decline can halt well above the March lows. — Lokeshwarri S.K
Source : HBL
