25 September 2018

Investors should take heed of bearish divergence

In a less than an auspicious start to the Year of the Horse, Hong Kong’s benchmark Hang Seng Index declined for two straight days this week, losing a combined 765 points. Across the ocean, the Dow Jones Industrial Average fell below the 200-day moving average for the first time since Dec. 28, 2012.

Just recently, during a bull run on the US stock markets, Wall Street analysts were making downward adjustments to profit forecasts of listed companies. 

Investors will do well if they heed such bearish divergence signal, according to the Hong Kong Economic Journal’s investor diary column. 

Yet unmindful of the warning indicators, investors continued buying stocks at bigger premiums. It was not until analysts stopped making their negative forecast revisions that investors became aware of the danger signs.

Another worrying sign, the diary says, is a persistent decline in the proportion of strong stocks.

Since Ben Bernanke indicated that the Federal Reserve would taper its massive bond-buying program, the technical trend of this so-called market breadth has turned worse.

Despite subsequent new highs in the S&P 500 Index in the seven months through December, fewer and fewer constituents were able to stay above their 200-day moving average. And after the recent decline, more than a third of its constituents have fallen below this critical level.

Similar signs of bearish divergence were present during three previous market corrections — April 2010, May 2011 and April 2012 – which erased gains accumulated over the previous six months in each case.

And in a repetition of these historical patterns, the Dow has dropped almost 6 percent so far from its historical peak seen last May.

So at this point, what should investors do?

Marketfield Asset Management’s strategy could provide some guidance. Since the bull market started in March 2009, Marketfield stepped in to buy shares each time the Dow fell more than 5 percent.

With a return record surpassing that of 99 percent of its peers, Marketfield may just be doing the right thing. After all, the company’s assets under management have surged to US$21 billion from just US$400 million in 2008.

– Contact us at [email protected]



Freelance journalist

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