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Markets on the Knife's Edge

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Extreme caution still recommended course of action.

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The list of well-known names identifying value on the US stock market at current levels is growing by the day, and includes the likes of Jeremy Grantham (GMO – "Careful buying is justified"), Warren Buffett ("Buy America. I am"), John Hussman (Hussman Funds – "Why Warren Buffett is right" and "How low, how bad, how long?") and Barry Ritholtz (The Big Picture – "Another buy in").

Even perma-bears such as James Montier and Albert Edwards (Société Générale – "Turning More Bullish") are increasing their equity exposure, albeit only for the short term.
Edwards sees the S&P 500 Index finally bottoming at 500, Grantham expects an "overrun on the downside" to between 585 and 780, and Hussman "hopes" for a bottom between 600 and 780.

Professor Bennet Sedacca (In Credit Unwind, Earnings Estimates Are Shots in the Dark and Traders' Paradise, But Investors Beware) similarly has an index level of 500 to 600 in his sight. In the meantime, the S&P 500 has been forming a so-called "descending triangle" since the middle of October. A triangle usually is a continuation pattern; i.e. when it occurs in a downtrend, the break is usually on the downside.

Based on technical analysis, such a breakout would imply a downside target of about 680.


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On the other hand (as a good economist will say), if a downside breakout doesn't occur, and we see a reversal to the upside, a strong countertrend rally could surprise investors.

Marc Faber, author of the Gloom, Boom & Doom Report, sees such an eventuality as follows:

"When based on some factors (technical and fundamental) a market is supposed to break out in one direction (up or down) and the breakout does not occur or fails, a very strong countermove usually gets under way.

"For what it's worth, I covered all my short positions before Tuesday's (November 4) almost 900 points rally [on the Dow Jones Industrial Index] and increased my equity exposure to 10% of my assets. I would consider a move above 900 for the S&P 500 to be a confirmation that a temporary low is in place."
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No positions in stocks mentioned.
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