Equity indices have lost their momentum to rise further

DESPITE continued fears of an economic slowdown, global equities had proved somewhat resilient over the last fortnight with traders jumping on any piece of good news as an excuse to buy.

But the 10-session winning streak in the MSCI World Index snapped on Tuesday and the index of global stocks has now shed 1.4 per cent in the past two days alone. Having hit resistance at 5,300 on Monday, the FTSE 100 has since fallen back to close at 5,178.52 yesterday while the Dow Jones Industrial Average slipped from 10,450.64 to 10,301.16.

While the falls themselves may not be particularly significant, does it signify that the markets are starting to lose their upward momentum and that traders should be expecting further downside in the days and weeks to come? Or are the markets simply consolidating their earlier gains in preparation for another leg higher?

One strategist who unsurprisingly falls into the former camp is Gluskin Sheff’s uber-bear David Rosenberg. “After successfully testing support at the key Fibonacci retracement level of 1,040, the S&P 500 has since bounced up to the 200-day moving average of 1,115 – and this failed to hold. Resistance prevailed.” The S&P was down at 1,090.07 yesterday evening. He adds: “My sense is that the market will break to the downside, and for three reasons.”

First, he thinks that even if the economy manages to avoid a double-dip recession – which most analysts think is probably likely – the market has still not been priced for a relapse in growth. The US economy, and indeed the world economy, is still in a fragile state. US housing starts data yesterday was particularly abysmal and China’s moves to put the brakes on could also cause global growth to waver in the near-term.

Second, Rosenberg believes that the intense volatility in the major averages over the past three months is consistent with the onset of a bear phase. And third, he subscribes to the view of ex-Merrill Lynch investment guru Bob Farrell, who thinks that a test of the March 2009 lows is likely. “I don’t think anyone is in a position to debate five decades of experience, not to mention his track record,” says Rosenberg.

future returns

But past performance is no indicator of future returns, as investment product providers are fond of telling us. And there are reasons to be positive on global equities – first, emerging Asia is still experiencing strong growth relative to the developed world even it is at a slower pace than before the financial crisis, second, the austerity Budget announced by chancellor George Osborne did not hit UK businesses as badly as had been feared and was welcomed, albeit cautiously, by the market.

It is clear that the market is at a critical juncture. Traders have noted some minimal buying activity in the past couple of days as investors capitalise on cheaper equity prices but with volumes light – and expected to stay light over the summer months – it will be hard to judge true sentiment in the market.

However, the risk of another move lower is far from negligible. For retail traders worried about their exposure to risk but who want to stay invested in global equities, there are some distinct advantages to using products such as exchange-traded funds (ETFs) or covered warrants.

ETFs give you inherently diverse exposure to stocks and can be tailored to suit your needs – for example, you can track the S&P 500 or the FTSE 100. And with covered warrants, the limited downside will suit risk-averse investors concerned about the potential for losses to stack up. You might well be hoping for the stock market to carry on rising over the summer but unless you are certain, or protected, don’t put your money where your mouth is.