"Bottom line," Cochinos writes, "Several indicators are calling for a risk correction. USD selling has reached previous reversion levels and greater buy-backs are to come."Cochinos believes that the US Dollar is highly oversold and due for a reversal - and a USD rally would typically coincide with a risk-off environment.
Cochinos first points to U.S. dollar selling by "real money" investors (i.e., pension funds, mutual funds, insurance companies, et al.), which has reached extreme levels recently – 1.8 standard deviations from the mean, to be exact.
In addition, he believes that equity flows are exhibiting overbought conditions:
Some of the analysis of Chief US technical analyst Mary Ann Bartels is also showing highly overbought conditions as well. The latest readings of her industry level overbought/oversold model is showing 16 overbought and 3 oversold industries for a ratio of over 5 to 1 - a highly extended condition [annotations in red are mine].
I don't want to put word in Mary Ann's mouth as she remains bullish and the title of her latest weekly commentary reads "Good earnings and liquidity power the markets higher". However, the industry level overbought/oversold model is one that I am very familiar with as I was once personally involved in producing that report on a weekly basis.
My own interpretation is that, despite the powerful positive momentum exhibited by stocks, these are conditions that usually precede corrections.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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