Saturday, November 01, 2008

Global Reversal Patterns at the End of October

In a recent post, I noted that the most beaten up stock market sectors were rallying the most at the end of October. We also have seen a recent reversal of downtrends in several asset classes. Above, we can see similar reversal patterns among global equity ETFs. The S&P 500 Index (SPY) declined the least during the market drop from September through October 27th (blue bars) and now has rebounded the least (red bars). We had a greater decline among stocks from Europe, Australasia, and the Far East (EFA), and now also a greater rebound. By far the largest market drop was recorded among the emerging markets (EEM), and now they have doubled the rebound of the U.S. stocks.

These days, it seems as though there are only two trades: you are either long risk assets (long stocks, long commodities, long euro) or you are selling them (long U.S. dollar, long yen, long Treasuries). Meanwhile, relief is slow in coming to the high yield corporate market, where yields backed up on Friday to near 20%. Impressive rallies notwithstanding, there appears to be a limit to investors' risk appetites.