By David Berman
Cam Hui at Humble Student of the Markets asks a question that is going to be asked a lot if stock market volatility continues: Where’s the bottom?
He believes that capitulation – that point at which the last bullish investors throw up their arms in resignation – isn’t close yet, given that sentiment readings continue to reflect investor optimism, the VIX index is not close to recent highs and a technical indicator for the euro suggests that the currency’s decline hasn’t ended.
He recommends keeping a close eye on European stocks, the source of the biggest current problem after all. The Euro Stoxx 50 index, though up 2.1 per cent on Tuesday, has slumped nearly 34 per cent since February, bringing it to an important level. As Mr. Hui explains, the index is testing support at about the 2070 level: “Should that not hold (and it likely won’t in the event of a Greek default or banking crisis), the next logical stopping point is the 2009 lows at 1600 – which represents a decline of 24 per cent from current levels.”
But there are other things to watch for in the meantime, including the behaviour of gold.
“During a panic liquidation, everything gets sold and the USD rallies,” he said. “Will gold get liquidated in a ‘margin clerk’ market? If not, I would expect at the very least the de-coupling of gold and gold stock prices – gold may rise, but gold stocks decline in sympathy with the broader equity indices.”