Don't worry, global stock markets now poised for a Rebound

Due to the Downgrade of the US Sovereign ratings by S&P, the current rout in the global stock markets seems like there is no end in sight. Last week the authorities hoped to downplay the severity of the downgrade by announcing the downgrade over the weekend when most markets are closed. Come Monday, all hell broke loose when trading bells open in Asia and Europe, markets are dropping like flies.

This event has long been overdue and it is just waiting for a catalyst and this time the main culprit being the downgrading of the US Sovereign status from AAA to AA+. It seems like it’s the end of the world with markets down 3-5% for the past few days. As such, there is no better time than now for contrarian play because “there is always light after the darkest hour of the night”, and now it seems to be the safest time to trade (not invest) in the markets.

In time of turmoil like this, the men will be separated from the boys. Truly professional investors are always contrarian investors. They are always will be the first to bail out from the markets when ordinary folks starts to crowd the market and always will be the first to get in when everyone abandoned the market.

According to Bloomberg’s July report on the ratio of insider selling to buying on the S&P , total shares sold amount to US$ 261,452,403,000 verses US 70,750,000 in buying . In other words the selling/buying ratio for the month of July is a whopping 3695.4 times or a ratio of 3700 : 1. In other words there are 3700 times more selling than buying for the month of July. Talking about smart money exiting the market !!

Another indicator on the flow of funds is the ICI fund flow data. For the week ending July, investors withdraw a massive $10.4 billion from the market. This is the second biggest weekly withdrawal since the May 6, 2010 Flash Crash where investors bailed out with US13.4 billion. This is the 15 weeks of consecutive outflow of funds which amounts to about $50 billion. Moreover with Bank of America’s July data showed that the cash/asset ratio of about 3.4% held by mutual funds doesn’t seem to augur well for the industry.

Any further withdrawal will mean that mutual funds will need to sell down their portfolio in order to satisfy the redemption by investors in the coming days and weeks. The following chart shows the Mutual Fund flows.

Technical indicators like Macd, Stochastic, RSI and Money Flow are all oversold meaning that the selling has already been overdone and it is just a matter of time buyers will come in for bargain hunting and eventually will again push the market up. Buying during oversold conditions represents much lower risk and also a higher risk/reward ratio.

For those who are in the funds industry, we know the cost of having funds lying idle. Funds lying idle and not invested only proved too costly because there are operating expenses, cost of funds, opportunity cost and redemption cost need to be taken into consideration. That is why all the funds needs to be fully invested most of the time.

Remember there are huge amount of money exiting the market in July, eventually it will need to find its way back into the market. With current valuations and most markets are oversold, these funds will soon find its way back into the market for bargain hunting.

The stock market operates on the Yin/Yang (negative and positive forces) principle. In any situation, the Yin and Yang forces will adjusts itself until it achieves equilibrium. The Western interpretation of the Chinese Yin/Yang principle is the waxing and waning of financial markets.

An example of the Yin/Yang in action can be seen during the Asian Financial Crisis in 1998. Markets all over Asia is crashing but on the other part of the world in Eastern Europe and Russia , there are experiencing a bull run.

In the current scenario there is too much Yang (selling) in the market, in order achieve a balance, the market needs more Yin which comes from the buying power. So in the current situation the Yang (oversold) forces will soon be neutralize by the Yin (buy) forces.

With the above factors favoring the buy side we will expect the global stock market to rebound soon, the earliest by this week. Attractive valuations and good fundamentals on markets and stocks alone is not enough to push prices up, you need MORE BUYING THAN SELLING.

- Malaysia Chronicle