At last the onset of summer seems to have taken the sheen out of the euphoria surrounding the equity markets and the global recovery. ECB's attempt to pump in Euros 1.2 trillion in two rounds of LTOR seems to have helped for about 4 weeks. 2012 is turning out to be remarkably similar to 2011.
Misplaced optimism that the Emerging markets will continue to recover seems to be eroding with the economies of India and China growing less than expected. In these countries investors, at last seem to be waking up to the reality that trees cannot grow to the sky.
In the US, Equity bulls continue to believe that their equity markets will continue to do well. The chart below (of the S&P 500) should worry any investor. The huge expanding triangle (red lines) on a larger time frame (2011 onwards) and in a shorter time frame (2012) along with major negative divergence (upper pane - yellow line) indicates that the equity markets are due for a shock sooner rather than later. An expanding triangle tends to dissipate the bullishness and the longer the time frame, the larger the fall. A retest of the 2011 lows and even 2008-09 lows need not be surprising.
While, optimistic investors may not accept the above chart, they would probably do well to ponder why the bond yields continue to be stubbornly low in most parts of the world.
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