Global equity markets have had a strong, if somewhat volatile, run since 2009 – but if you are invested in stocks, now is not the time to be complacent.
Looking at technical analysis charts, it appears we are approaching a crucial juncture – what happens in the next three or four months is likely to dictate the direction of markets for the next three or four years.
The MSCI All Countries World Market (ACWM) Index is a good general guage to watch, as it consists of 23 developed and 23 emerging markets. Five years since the global financial meltdown, the index has now reached its 2007 high at the 430-point level.
The journey over the past five years has been particularly volatile, especially compared to the 2003-07 period. There was a sharp rebound in 2009, which contrasted dramatically with the slow base building in the 2002-03 period, when the previous sustained rally began. Then a two-year pause set in, from 2010 to 2012, before a prolonged and steady rise to current levels. From the low of 2009, the index has more than doubled thanks to strong sentiment towards risk assets at a time of extreme monetary easing across the world.
Given that 430 points is a key level both psychologically and technically for the index, it would take a lot of positive economic news and momentum to clear this barrier, especially as emerging markets and global commodity prices are showing softness.
If there is a breakout, we would be looking at the possibility of another five-year rally. Failure to breach this level would be bearish, and could lead to market weakness for the next three or four years.
So what can we look at in the coming months to give us an early indicator of which way the market will go?
Firstly, you can look at the moving average convergence divergence (MACD), a technical tool developed in the late 1970s as a simple and effective indicator of trend and momentum.
On the chart, the red line is the MACD indicator, which represents the difference between the 26 and 12-day moving averages for the MSCI ACWM index. It needs to be seen in relation to the blue dotted “signal line”, which is the nine-day moving average of the MACD indicator. If the indicator stays above the signal line, as it is now, this indicates strong momentum and a continued uptrend. If the red lined MACD indicator crosses below the dotted blue signal line, this would indicate a weakening in momentum, which would threaten the uptrend.
A second indicator to look at is the long-term moving average for the MSCI ACWM index – in this case the three-year moving average. Over the past decade this has been helpful for staying on the right side of the market. Currently the index is above the moving average – which stands at 370 levels – signalling an uptrend.
Failure to break above the 430-point level would result in the index dropping back to support the long-term moving average.
Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD
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