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We're Caught in a 'Bull Trap' and Can't Get Out

We're Caught in a 'Bull Trap' and Can't Get Out
(Dollar Photo Club)

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Wednesday, 02 September 2015 01:37 PM Current | Bio | Archive

In today’s world, there still lacks any sign decelerating global growth has come (at least) to a halt.

Global trade also shows further contraction. Emerging economies continue showing weakness and the real GDP in the Organization for Economic Co-operation and Development (OECD) area (the 34 globally economic most important countries) by growing 0.4 percent in Q2 of 2015, down from 0.5 percent in Q2, confirms the overall global growth malaise remains well in place notwithstanding all the still ongoing quantitative easing (QE) programs, of which only the U.S. and the U.K. seem getting closer to end their respective QEs.

International Monetary Fund (IMF) Managing Director Christine Lagarde confirmed all this by stating in a prepared speech: “… Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July. This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America. Asia as a region is still expected to lead global growth. But even here, the pace is turning out slower than expected—with the risk that it may slow even further given the recent spike in global risk aversion and financial market volatility … the Chinese economy is adjusting to a new growth model, growth is slowing — but not sharply, and not unexpectedly.”

On Tuesday, we got also, once again, another broad-based extreme volatile downward day in markets all over the globe because of renewed fears the slowdown in China could be much more important than was generally thought until now.

The official Chinese Manufacturing Purchasing Managers Index (PMI) for August came in at 49.7, which was 0.3 percentage points into contraction territory, down from 50 in July and at its lowest level in just under 3 years.

The privately measured Caixin Manufacturing Purchasing Managers Index came in at a more than six years low at 47.3 for August and down from 47.8 in July, notwithstanding China has now lowered its interest rates 5 times since last November while it has also repeatedly eased the banks’ Reserve Required Ratios (RRR), which permit them to lend more from their deposits.

That said, it now has become clear markets get the jitters when Chinese markets are heading south.

Please don’t get me wrong and I’m certainly not predicting what’s going to happen to the Chinese markets, but it’s also a fact that technical analyses of markets have historically proven their value on what could be expected down the road.

In this context and looking at the Shanghai Composite Index while taking into account among other techniques (the Elliott Wave principle), there is a possibility the Shanghai market could further go down from where it stands today by about 50 percent, or roughly down to about 1,500, during the next 6-9 months. (Editor's Note: The Shanghai Composite Index edged down 0.20 percent, or 6.45 points, Wednesday to close at 3,160.17.)

No, this is not written in stone, but nevertheless I don’t think it could hurt long-term investors keeping that possibility in mind when considering to step in the markets again before the ongoing washout is complete.

Today, there are many indications, in the U.S. as well as in other important global markets, the so-called institutional investors are mainly no more actively participating in the markets. The markets have now become mainly the domain of the public in the U.S., but also in China, etc.

Unfortunately, those who are still invested seem to be in what’s called a “bull trap.” (Editor’s Note: A bull trap is commonly defined as a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline. )

Of course, nothing is ever 100 percent for sure, but as a long-term investor, I’d prefer remaining on the fence for the time being and wait until there are clear signs we are closing in on "real" bottoms in equities, commodities, etc.

Where we go further down the road will mainly depend on where the Chinese economy goes, and that will probably be further downwards. Of course, not collapsing!

Yes, there will come much better “real” long-term buying opportunities based on much better (not artificially stimulated) fundamentals that at the end of the day always define long-term investments.

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HansParisis
Of course, nothing is ever 100 percent for sure, but as a long-term investor, I’d prefer remaining on the fence for the time being and wait until there are clear signs we are closing in on "real" bottoms e.g. in equities, commodities, etc.
stock market, bull trap, investors
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2015-37-02
Wednesday, 02 September 2015 01:37 PM
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