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Will Markets Retreat 10 Percent -- or More?


Now is the time for a defensive position.

It seems as if the spring rally has probably exhausted itself. And it's about time, given the extent and rapidity of the move. The MSCI World Index increased by 45.2% from its March lows until the early June high, and the MSCI Emerging Markets Index by a staggering 68.9%. Both these indices have only had one down week since the advance commenced in early March.

Leading markets such as Russia (+137.0%), India (+89.5%), China (+54.7%), and Brazil (+50.4%) significantly outperformed laggards such as the Dow Jones Industrial Index (+27.5%) and the S&P 500 Index (+39.9%), although all markets recorded very respectable returns. The major US indices have gained for 12 out of the past 14 weeks.

Focusing on the US, the S&P 500 Index (911) has backed off resistance at its January high (935) and is less than 5 points away from breaking down through the key 200-day moving average (906) -- broken to the upside only 2 weeks ago.

Importantly, short-term oscillators such as the rate-of-change (momentum) indicator is on a knife's edge of giving a selling signal -- i.e. crossing through the zero line in the bottom section of the chart below. Also note the negative divergence between the Index and the ROC line -- typically this would be a warning sign that a near-term trend change will take place.

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