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S&P turns bearish, could start a global down move

Posted: 10/24/2012 - 9:55 am

The last thing regional markets needed was a bearish reversal in global indices led by the US. And we are not talking about a one-day contagion effect that will spill-over to the region but a bigger potential down move triggered by the world’s leading markets.

Needless to say, last night’s sharp drop in global asset classes is expected to take a toll on regional indices including Saudi, UAE and Qatar. The fall was broad-based with selling pressure witnessed across the board: from equities to oil to industrial commodities and precious metals.

The issue we see is not the anticipated negative reaction we will likely witness in the region today but it is the message the US index (S&P500) is sending. In our view, last night’s sell-off was not only significant because of its magnitude but because it also marked the break of a 6-week trading range.

Technically, the odds are high that a short-to-medium term top is already in place in the S&P500 and that the index will likely head down to the 1370-1350 zone over the coming weeks. Any reactionary bounce that could come from last night’s sell-off will likely be met with renewed selling pressure.

The break comes at an interesting time since the US presidential election is due to take place in early November and it seems the outcome will have a material impact on Wall Street and the markets (a win by Romney is expected to give a boost to the markets, at least as an initial reaction).

Still, we think last night’s price action in global markets is painting a short-term bearish picture and we believe that the risk is to the downside in the next two months.

Impact on GCC

It goes without saying, any material sell-off in global markets is expected to drag regional indices down with it. What adds to the problem is the fact that we had a somewhat disappointing earnings season which gives traders and investors little reason to get into the markets.

With Saudi closed next week and other regional indices facing a shortened week due to the holiday season, we would clearly avoid buying today’s anticipated pull backs.

Our general advice in recent posts was to avoid buying ahead of company results and to keep the allocation to any buying opportunities at a minimum ahead of the holidays. In fact, our focus was on locking the gains in markets where rallies have taken place (read: Dubai: price action at its best).

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