Equities
We downgraded global equities during the summer based on lofty valuations, overly bullish sentiment, and the prospect of slowing global growth. Since then, valuations have improved and sentiment has turned more cautious. Global growth will continue to…
The Brexit tension remains high and may even intensify in early 2019 before a resolution arrives. Hence, while 2019 will offer a great opportunity to buy the pound, it will require a little patience. In contrast, Italy is de-escalating its brinkmanship with…
In China, the slowdown is occurring not only in the industrial parts of the economy, but also in household spending. In the case of the industrial segments, falling new and backlog orders are heralding further deterioration in manufacturing output growth. The…
Global machinery, chemicals, freight and logistics, as well as semiconductor stocks, have been underperforming the global equity index in a falling market. This is consistent with an ongoing slowdown in global growth. EM relative equity performance versus DM…
Household product stocks have typically performed well as retail gasoline prices have contracted; this iteration has proven no different. This boon to consumers has supported an uptick in spending on household products, which should translate into top line…
Over a 6-12 month time horizon, valuation rarely drives asset returns, and our China Investment Strategy team recently argued against the view that valuation could act as a rally catalyst for Chinese stocks in 2019. However, we agree that valuation should be…
Highlights Asset allocation: Start 2019 with an overweight to industrial commodities versus equities. Await an oversold sell-off signal on the 65-day fractal dimension to go tactically overweight equities versus cash. Equities: Start 2019 with a cyclical equity sector tilt, but become more defensive as the global economy inevitably flips into a down-oscillation later in 2019. Start tactically overweight Italy’s MIB versus the Eurostoxx. Bonds: Initiate a bond yield convergence play: long 10-year Italian BTPs versus Spanish Bonos. Currencies: Start 2019 short EUR/JPY combined with long EUR/USD. There will be a great opportunity to buy the GBP, but not yet. Alternatives: A compelling buying opportunity for the cryptocurrencies Litecoin and Ethereum. Feature 2019 will present investors a mirror-image pattern to 2018. Through most of 2018, global growth was decelerating while inflation was accelerating. Now this configuration is flipping: global growth is rebounding while inflation is set to collapse. Growth To Rebound, Then Fade Global growth has entered an up-oscillation, for which the evidence is irrefutable: Industrial (non-oil) commodities are strongly outperforming equities, and rising even in absolute terms (Chart of the Week and Chart 2). Emerging markets are strongly outperforming developed markets (Chart 3). Financials are outperforming the broad equity market (Chart 4). Sweden’s manufacturing PMI – a bellwether of global activity – is rebounding strongly (Chart 5). Perhaps most importantly, China’s 6-month credit impulse has gone vertical (Chart 6). Chart of the WeekNon-Oil Commodities Are Strongly Outperforming Equities Chart I-2Non-Oil Commodities Are Recovering In Absolute Terms Too Chart I-3Emerging Markets Are Strongly Outperforming Developed Markets Chart I-4Financials Are Outperforming Chart I-5Sweden’s Manufacturing PMI Is Up Sharply Chart I-6China’s 6-Month Credit Impulse Has Gone Vertical Taken together, this is compelling evidence of a growth rebound, even if it is modest. Crucially, such up-oscillations tend to last at least six to eight months. Hence, equity sector performances, which always take their cue from global growth, will follow a mirror-image pattern in 2019 to that in 2018. Bottom Line: Start the year with an overweight to industrial commodities versus equities and a cyclical equity sector tilt, but prepare to fade to a more defensive tilt as the global economy inevitably flips into a down-oscillation later in 2019. Inflation Is The Dog That Will Not Bark There are not many things that are certain in the economy, but a racing certainty for early 2019 is that headline inflation will collapse. This is because the plunge in the crude oil price – 40 percent so far and getting worse by the day – is about to feed through into headline consumer price indexes (Chart 7 and Chart 8). Inevitably, it will seep through into core inflation too, via the impact on energy dependent prices such as transport costs. Chart I-7Headline Inflation Will Collapse In Europe Chart I-8Headline Inflation Will Collapse In The U.S. Coming at a time that central banks have professed a much greater reliance on “incoming data”, we can deduce that central banks will find it hard to tighten policy in the face of weaker headline and core inflation prints. Crucially though, the ECB and BoJ were not planning on tightening policy anyway, so the plunge in reported inflation will be much more impactful on the Fed. This makes the dollar vulnerable, leaving us a choice between the euro and yen as our preferred major currency. And on this head-to-head the yen still beats the euro given its lower political risk: Bottom Line: Start 2019 short EUR/JPY combined with long EUR/USD. Use ‘The Rule Of 4’ And Fractals To Predict Tipping-Points For Equities Investment strategists are obsessed with timing the next recession. The thinking is that by predicting the next recession they can predict the next equity bear market. The logic sounds fine, except that the causality rarely runs from economic downturns to financial market instabilities. The causality almost always runs the other way. Paul Volcker, arguably the greatest central banker of the modern era, correctly points out that the danger to the economy almost always comes from systemic financial disturbances. The last three downturns, in 2000, 2007 and 2011, all resulted from financial disturbances: the bursting of the dot com bubble, the gross mispricing of U.S. sub-prime mortgages, and the distortion of euro area sovereign debt markets respectively. Instead of timing the next recession to predict financial market instability, the correct approach is to flip the logic around and ask: is there a glaring source of financial instability that could cause the next recession? To which the answer is yes. The current glaring instability is the hyper-vulnerability of elevated risk-asset valuations to the global bond yield. Near the lower bound of bond yields, bond prices develop the same unattractive negative asymmetry as equities, removing the need for an equity risk premium, and justifying sharply higher equity valuations. But when the 10-year global bond yield rises back to around 2 percent – or equivalently when the sum of the 10-year U.S. T-bond, German bund and Japanese government bond approaches 4 percent ‘the rule of 4’ – the process viciously reverses: bond prices lose their negative asymmetry, re-requiring an equity risk premium and sharply lower equity valuations (Chart 9 and Chart 10). Chart I-9Equities Plunged In February After A Spike In Bond Yields Chart I-10Equities Plunged In October After A Spike In Bond Yields In 2019, just as in 2018, investors should use this dynamic to allocate tactically to equities versus cash as follows: 1. When the rule of 4 approaches 4 and the market’s 65-day fractal dimension signals an overbought rally, go underweight equities. 2. When the rule of 4 approaches 3 and the market’s 65-day fractal dimension signals an oversold sell-off, go overweight equities. 3. At all other times stay neutral. Bottom Line: With the rule of 4 now approaching 3, await an oversold sell-off signal on the 65-day fractal dimension to go tactically overweight equities versus cash. Britain Escalates EU Tensions, Italy De-Escalates The two points of political tension in Europe, the U.K. and Italy, have a common theme: brinkmanship with the EU. The Brexit tension remains high and may even intensify in early 2019 before a resolution. Hence, while 2019 will offer a great opportunity to buy the pound, it might require a little patience. In contrast, Italy is de-escalating its brinkmanship with Brussels over its budget deficit. Meanwhile the crux of Italy’s long-standing woes – its banking system – is also showing signs of healing. The proportion of bank loans that are non-performing is plummeting, while the solvency of the banking system continues to improve (Chart 11 and Chart 12). Chart I-11Italian Banks’ NPLs Are Plummeting… Chart I-12…And Italian Banks’ Solvency Is Improving Bottom Line: Initiate a bond yield convergence play: long 10-year Italian BTPs versus Spanish Bonos. And tactically overweight Italy’s MIB versus the Eurostoxx. Cryptocurrencies Will Rebound 60 Percent Cryptocurrencies are here to stay, because the underlying technology, the blockchain, is here to stay. Just as the internet’s major innovation was to decentralise and democratise information, the blockchain’s major innovation is to decentralise and democratise trust. Until now, counterparties without an established trust relationship could only transact through an intermediary who could provide the necessary trust overlay. But once each participant in a transaction trusts the blockchain itself, they no longer need to use a conventional intermediary, like a bank or a law firm. One major argument against the blockchain is that it is energy intensive and therefore prohibitively costly. But conventional intermediation also exacts a significant cost. Let’s say that the stock of excess savings that the banks intermediate to borrowers conservatively equals global GDP. If the risk-adjusted interest rate spread that banks charge for their intermediation role conservatively equals 1 percent, it means that this conventional intermediation is costing 1 percent of global GDP. Against this, global energy consumption equals roughly 5 percent of global GDP. So even if the blockchain consumed a fifth of the world’s energy, its cost might still be comparable to conventional intermediation. The plunge in cryptocurrencies during 2018 was exacerbated by the recent ‘hard fork’ in bitcoin protocol. But such hard forks are a necessary part of the evolutionary process – being analogous to a Darwinian mutation which eliminates the weakest protocols while allowing the strongest and fittest to thrive. In the latest fork, the battle was between those who want cryptocurrencies to remain a speculative asset with low long-term survival prospects, and those who want them to become a stable means of payment with high long-term survival prospects. A year ago almost to the day, we recommended selling bitcoin at a price of $18,000. Our rationale was that excessive herding required a price gap down to normalise liquidity. The subsequent decline in the price to $3500 today has rewarded that recommendation handsomely. But today, Litecoin and Ethereum are approaching an opposite tipping-point where the price may have to gap up to normalise liquidity (Chart 13 and Chart 14). Chart I-13Litecoin Is Oversold On A 65-Day Horizon Chart I-14Litecoin Is Oversold On A 130-Day Horizon Bottom Line: A compelling buying opportunity for the cryptocurrencies Litecoin and Ethereum. For a 50:50 basket, target a return of 60 percent. And on that positive note, I am signing off for the year. I do hope that you have enjoyed reading this year’s reports, but more importantly that you have found value in them. This publication’s philosophy is to think out of the box, independently and unconstrained, never to shirk from challenging the received wisdom, and ultimately to provide successful investment ideas. We promise to continue this way in 2019! It just remains for me to wish you a very happy holiday season and a prosperous new year. Dhaval Joshi, Senior Vice President Chief European Investment Strategist dhaval@bcaresearch.com Fractal Trading Model* As discussed in the main body of this report, this week’s recommended trade is to buy a 50:50 combination of Litecoin and Ethereum. Set a profit target of 60 percent with a symmetrical stop-loss. As also discussed in the main body of this report, remain tactically overweight Italy’s MIB versus the Eurostoxx. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com. Fractal Trading Model Recommendations Asset Allocation Equity Regional and Country Allocation Equity Sector Allocation Bond and Interest Rate Allocation Currency and Other Allocation Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1 Chart II-2 Chart II-3 Chart II-4 Interest Rate Chart II-5 Chart II-6 Chart II-7 Chart II-8
Dear Clients, This is the final publication for the year. The Emerging Markets Strategy team wishes you a very happy holiday season and a prosperous New Year! Best regards, Arthur Budaghyan Highlights The recent EM outperformance is a mid-bear market stabilization, and is at its late stage. Market signals and economic data are consistent with a further slowdown in global growth emanating from China/EM. We reiterate that global trade is heading for a period of contraction and investors should position accordingly. EM will sell off even as U.S. bond yields drop further. Feature Global investors have been increasing their absolute exposure to EM equities over the past two months, despite the ongoing drop in DM share prices.1 The common narrative is that a potential pause by the Fed next year, the trade truce between the U.S. and China and the latter’s ongoing stimulus measures are together sufficient to propel EM risk assets higher on a tactical and even cyclical horizon. In contrast, we believe the recent EM outperformance is a mid-bear market stabilization, and is at a late stage. We have written at length that neither the Fed nor the trade wars were the main culprit behind the EM selloff early this year. The key reason behind the EM and commodities selloff was the slowdown in Chinese/EM economies and global trade. China’s policy stimulus has so far been insufficient to reverse the economy’s growth slump. As such, the odds are that China/EM growth and global trade will continue to disappoint, and the EM selloff and underperformance will resume sooner than later. Market Signals EM risk assets are sensitive to China’s growth and global trade. Market signals remains downbeat on both. In particular: Global cyclicals continue to send a bleak message about the global business cycle. Global machinery, chemicals, freight and logistics as well as semiconductor stocks have been underperforming the global equity index in a falling market (Chart I-1). This is consistent with an ongoing slowdown in global growth. Chart I-1AGlobal Cyclicals Are Underperforming In A Falling Market Chart I-1BGlobal Cyclicals Are Underperforming In A Falling Market EM relative equity performance versus DM has historically been tightly correlated with global materials’ share prices versus the overall global stock benchmark (Chart I-2, top panel). Remarkably, the recent EM outperformance has not been corroborated by outperformance of global materials (Chart I-2, bottom panel). This is additional evidence that suggests investors should fade this EM rebound/outperformance. Chart I-2EM Vs. DM Is Akin To Global Materials Vs. Benchmark Index EM risk assets are very sensitive to both global trade and commodities prices. The majority of forward-looking indicators on global trade remain dismal (please refer to the section below for a more detailed discussion on this topic). Interestingly, the current trajectory of global equities – including the run-up in share prices before January 2018’s peak, the top formation itself, and the subsequent decline – impeccably track the same trajectory that occurred between 1998 and 2000 in terms of both oscillations and magnitude (Chart I-3). Chart I-3Are Global Equities In A Bear Market? The top in 2000 was followed by a devasting, three-year bear market. We are not arguing this global equity selloff will last that long nor be that large. What we are saying is that this turbulence will last another several months, and that there is still considerable potential for further drawdowns. Finally, the silver-gold ratio is breaking below its previous lows, including its early 2016 low (Chart I-4). Such a breakdown could be a precursor of a deflationary shock stemming from the Chinese economy. Chart I-4Beware Of Breakdown In The Silver-Gold Ratio Global Trade: A Contraction Ahead? This section elaborates on the fundamental rationale behind the selloff – the deepening global business cycle downturn stemming primarily from China/EM economies: There are several indications that the global slowdown is already hurting American manufacturing. In the U.S., the CASS Freight Shipment Index, which measures North American freight volumes and is published by the Saint Louis Federal Reserve is foretelling an impending slump in the manufacturing sector (Chart I-5, top panel). Chart I-5U.S. Growth Is Slowing Consistently, the growth rates of both total intermodal carloads and railroad carloads excluding petroleum and coal have rolled over decisively (Chart I-5, middle and bottom panels). As U.S. manufacturing slows, U.S. Treasury yields will drop further. In China, the slowdown is occurring not only in the industrial parts of the economy but also in household spending (Chart I-6). Chart I-6Chinese Consumer Is In A Soft Spot In the case of the industrial segments, falling new and backlog orders are heralding further deterioration in nominal manufacturing output growth (Chart I-7). Accordingly, the construction and installation component of fixed asset investment is already very weak, while equipment and instrument purchases are contracting. Chart I-7Chinese Manufacturing: Deepening Slump The key channel in which China impacts the rest of the world is through its imports. In turn, the latter are driven by the nation’s credit and fiscal spending impulse (Chart I-8, top panel). That explains the linkage between the Chinese credit and fiscal impulse and EM corporate profits (Chart I-8, bottom panel). Chart I-8The Linkages Between Chinese Credit & Fiscal Spending, Imports And EM Profits Crucially, the import sub-component of mainland manufacturing PMI has plunged well below the 50 boom-bust line and signals further downside in EM equities and industrial metals prices (Chart I-9). Chart I-9Chinese Imports Versus EM Stocks And Industrial Metals This is consistent with contracting Chinese imports from various countries (Chart I-10). This is how China’s negative growth shock is promulgating throughout the rest of the world. Chart I-10German And Japanese Shipments To China To Contract Finally, the growth rate of Korean, Japanese, Taiwanese and Singaporean aggregate exports is approaching zero, which is typically a bad omen for EM share prices (Chart I-11). Chart I-11Asian Exports And EM Stocks What’s more, Taiwanese shipments of electronic products parts are begining to contract, which hearalds a bleak outlook for both the global trade cycle and EM technology sector profits (Chart I-12). Consistently, semiconductor prices have continued to fall precipitously. Chart I-12Prepare For More Weakness in Global Trade Bottom Line: We reiterate that global trade is heading for a period of contraction due to the deepening growth slump in China/EM. Chinese Stimulus and U.S. Growth: Lost In Translation? We endeavor to tackle two critical questions: (1) Why has policy stimulus in China failed to stabilize growth? We have written about this extensively in previous reports and will review our key points briefly. First, regulatory tightening on banks and non-bank financial institutions is overwhelming the benefits of lower interbank rates. New regulations are constraining banks’ and financial intermediaries’ ability to expand their balance sheets as aggressively as before. Slowing credit growth has so far offset robust fiscal spending – please refer to Chart I-8. Second, in a system saddled with extreme leverage, non-performing loans and very weak capacity to service debt, the impact of lower interest rates on credit origination is likely to be minimal. This diminishes the efficacy of monetary policy easing on credit growth. China’s credit excesses are enormous, and deleveraging is probably in the very early innings (Chart I-13, top panel). Notably, company and household credit are still expanding at a 10% pace from a year ago (Chart I-13, bottom panel). Chart I-13Has China Started Deleveraging? Not Really Third, the authorities are facing a formidable dilemma between opting for lower interest rates and/or maintaining a stable exchange rate. We have been highlighting the tight correlation between the CNY/USD exchange rate and interest rates. The recent stabilization in the CNY/USD may have been due to the latest rise in Chinese interbank rates (Chart I-14). Chart I-14China's Monetary Policy Dilemma Yet, the real economy in China and its numerous indebted entities require lower (and probably zero) interest rates for a couple of years, as occurred in Japan, the U.S. and the euro area in the years following the peaks in their respective credit bubbles. All in all, it is not clear if the authorities can reduce interest rates without eliciting currency depreciation. For now, the jury is still out. Fourth, net liquidity injections into the banking system by the People’s Bank of China (PBoC) have been minimal in recent years (Chart I-15, top panel). In fact, commercial banks’ excess reserves at the PBoC have been flattish over the past three years (Chart I-15, bottom panel). While the media and many commentators have been focused on the reserve requirement ratio reductions that have infused a lot of excess reserves into the banking system, there have also been many expired lending facilities from the PBoC to banks. The net result has been flattish liquidity trend in the banking system. Chart I-15Chinese Banking System's Excess Reserves Are Flattish While there is no limit on a central bank’s ability to provide more excess reserves to the banking system, spare liquidity could push interbank rates lower and possibly trigger currency depreciation. Finally, monetary and fiscal policies work with varying time lags. Critically, the aggregate credit and fiscal impulse remains in a downtrend, pointing to less imports and hence a downbeat outlook for EM corporate earnings (please refer to Chart I-8). (2) Why has global trade decelerated amid robust U.S. demand? U.S. import growth has been very robust, yet global trade has slowed (Chart I-16). Chart I-16Robust U.S. Imports Have Not Precluded Global Manufacturing Slowdown The reason behind this is very simple: U.S. and EU annual merchandize goods imports amount to $2.5 trillion and $2.2 trillion, respectively – dwarfed by EM (including China) imports of $6 trillion (Chart I-17). Chart I-17EM Imports Are Larger Than Combined U.S. And EU Imports This value of EM imports excludes China’s imports for processing and re-exporting as well as all the imports of Mexico and central Europe, which also include a lot of inputs that are processed and re-exported. In spite of these adjustments, EM imports are still considerably larger than U.S. and EU imports combined. Hence, robust U.S. final demand is in and of itself insufficient to both offset and support global trade growth when EM/China demand falters. This is especially pertinent to commodities and industrial goods, where China/EM are large consumers. Chart Patterns: Reading Market Tea Leaves There is no magical formula that can guarantee making money in financial markets. Economic data are lagging, markets can change direction abruptly, and indicators can break down or give false signals from time to time. Besides, financial markets do not move in straight lines, and differentiating the noise from the signal is not a simple exercise. The odds of making money or outperforming are higher when investors are correct in their big- picture judgements – i.e., when their thematic views on the global economic and investment landscapes are accurate. Markets can be very noisy and volatile in the short term, yet there are several critical chart patterns that we are taking comfort with as they are consistent with our macro themes. The latter are the following: Sagging China/EM growth, a deepening global trade slump, lower commodities prices and a stronger U.S. dollar/weaker EM currencies. Our Risk-On versus Safe-Haven Currency Ratio2 has relapsed since early this year after failing to break above its previous top (Chart I-18). In and of itself, this is already a bearish chart formation. Besides, it seems this market indicator is forming a potential head-and-shoulders pattern. Chart I-18A Bear Market In Risk-On Versus Safe-Haven Currencies Ratio Any relapse from current levels will validate the head-and-shoulders profile. As a result, the odds of a major plunge will rise, which would be consistent with our themes and outlook. EM share prices in dollar terms have also struggled to break above their 2007 highs in the past 10 years, despite the bull market in the S&P 500 during this period (Chart I-19). Remarkably, the EM stock index is presently sitting on several of its long-term moving averages. They make a formidable technical support. Box 1 elaborates why we use these long-term moving averages in our regular reports. Chart I-19EM Equities Are Facing An Air Pocket If these technical supports give in, EM equities will hit an air pocket – with the next technical support lying 25% below the current level. It is no surprise that an intense battle between bulls and bears is currently being waged. Provided EM corporate profits are set to contract in the first half of 2019, as per our analysis above, we believe these technical supports will be violated and that a major plunge in share prices is very likely. Finally, share prices of global energy and mining companies rolled over early this year at their long-term moving averages (Chart 20, top and middle panels). These long-term moving averages acted as a support in bull markets; now they have become a resistance. Hence, it makes sense to argue that energy and mining stocks remain in a secular bear market, and the 2016-‘17 advance was a bear market rally. If so, further downside in their share prices could be substantial. Meantime, global semiconductor share prices rolled over at their 2000 peak earlier this year (Chart I-20, bottom panel). This is a bad technical sign and might signify that a non-trivial slowdown in global growth may last for quite some time. Chart I-20Global And Mining Stocks Remain In A Secular Bear Market Typically, in the periods when resources and technology stocks sell off, EM equities and other risk assets perform badly. It appears we are currently in such a phase, and it will not be short-lived. Investment Strategy China/EM growth conditions continue to worsen. Tactically and cyclically, risks to EM stocks, currencies, credit and high-yielding local bonds are skewed to the downside. We continue to recommend playing EM on the short side. Playing a market on the long side when fundamentals are deteriorating and valuations are not cheap is akin to collecting pennies in front of a steamroller. The recent outperformance of EM equities and credit versus DM is unsustainable. Continue to underweight EM. For dedicated EM equity portfolios, our overweights are Brazil, Chile, Mexico, Russia, central Europe, Korea and Thailand, while our underweights are Indonesia, the Philippines, Peru and South Africa. We are considering to upgrade India from underweight to neutral. Our preferred short currency basket versus the U.S. dollar consists of the ZAR, the IDR, the CLP, the COP and the KRW. Box 1 - Our Long-Term Moving Average Framework “All through time, people have basically acted and re-acted the same way in the market as the result of: Greed, Fear, Ignorance & Hope. That is why numeric formations and patterns recur on a constant basis.” - Jesse Livermore, in Reminiscences of a Stock Operator The basis for examining price patterns with their 200-, 400-, 800-, 1600- and 3200-day moving averages (MA) – corresponding to nine months, 18 months, 3-, 6-, 12 and 24-year moving averages – is as follows: The 200-day MA is a very widely known and well-used measure. We have observed that when the 200-day MA breaks in a bull market, the next support could occur at the 400- or 800-day MA levels – i.e., the multiples of the 200-day MA. Following the same logic, we examined even longer-term moving averages such as 6-, 12- and 24-year MAs. Interestingly, we discovered that the 3- and 6-year MAs worked very well during the S&P 500 bull run of the 1950s and 1960s (Chart I-21, top panel). Besides, during the bull market of the 1980s-‘90s, the S&P 500 selloffs also found support at the 3- and 6-year MAs (Chart 21, bottom panel). Chart I-21The S&P 500 And Long-Term Moving Averages Meanwhile, the bear market bottoms in 1982 and 2002-‘03 in the U.S. equity market occurred at a very long-term (12-year) MA (Chart I-21, bottom panel). Similarly, in the fixed-income universe, throughout the more than 35-year- strong U.S. bond bull market, the rise in bond yields often topped out when 10-year Treasury yields reached their 6-year MA (Chart I-22). Chart I-22U.S. Bond Yields And Long-Term Moving Averages These observations have led us to infer that structural trends cannot be considered completely broken as and when markets cross their 200-day MA. Large selloffs (or cyclical bear markets) within structural bull markets can push prices to their very long-term moving averages such as 3- or 6-year MAs. The opposite holds true for tactical and cyclical rallies within bear markets. Besides, we have also observed that when a financial market in a selloff finds support at a particular long-term MA, it usually resumes its rally and often advances to new highs. On the contrary, when a market rallies but fails to break above its long-term MA (resistance), it often experiences a breakdown. We often apply this long-term moving average framework to analyze trends in various financial markets, and contrast and evaluate these with our fundamental economic themes. As to the question of why these numbers work, the quote above from Reminiscences of a Stock Operator could be the answer. Arthur Budaghyan, Senior Vice President Emerging Markets Strategy arthurb@bcaresearch.com Footnote 1 BoA December survey 2 Average of CAD, AUD, NZD, BRL, CLP & ZAR total return indices relative to average of JPY & CHF total returns (including carry). Equity Recommendations Fixed-Income, Credit And Currency Recommendations