Barclays Capital Predicts 2010 Market Corrections: My Thoughts

by: EconMatters

In a CNBC interview on December 31, 2009 (video below), Jordan Kotick at Barclays Capital (NYSE:BCS) shared technical chart tales of some possible market corrections in Q1 or Q2 of 2010.

Bovespa (BVSP): Index, currently at an almost all time new high, is signaling a possible correction coming when traders start to fade this market. But overall trend is still upward positive. Brazil, Mexico and Chile are the three crucial ones to watch in the emerging markets.

My Take: Brazil has outperformed all three other BRIC stock markets since November 2001, based on MSCI country indexes. Brazilian stocks have posted hefty gains of about 83% for 2009 after plunging 41.2% in 2008. The foreign investment capital pouring into the country has also helped the Brazilian currency, the real, strengthen 34% against the greenback last year. In addition, Brazil just snagged a coveted third investment-grade rating last September from Moody's.

So, from all indications, it seems any Bovespa (BVSP) technical correction should just be another starting point for more new highs. (See my analysis on Brazil here.) Resource rich Chile is also looking red hot as the global leading copper producer. However, Mexico is facing some headwind with the Fitch and Standard & Poor's credit downgrade on fiscal concerns stemming from the country’s falling oil output and anemic growth prospects.

Technology - Tech stocks were the big winners in 2009, but Nasdaq Advance/Decline chart shows the breadth is starting to roll to the downside.

My Take: Among the 10 major industry sectors in the S&P 500 index, tech stocks lead all sectors and have rallied 59% in 2009, even ahead of the base metals sector. It appears tech already has a lot of built-in froth considering it is "non-tangible", and lacks the powerful fundamental support, for example, from China, that the base metals sector has. From that perspective, Mr. Market seems to have priced in a substantial and lasting economic rebound with very little margin of safety.

Banking - Bank stocks are the epicenter of the market; however, based on the Relative Value chart, bank stocks are looking vulnerable right now, which could lead to a broader market downturn.

My Take: As discussed in my earlier article, commercial and commercial real estate loans are still deteriorating at a rapid rate. And despite promising early indicators, consumer loan losses continue to climb. Furthermore, let's not forget there still could be a sovereign default or two in 2010. These highly probable events, just to name a few, once unraveled, are bound to take a few more banks down with them. (See my quick take on Fannie (FNM), Freddie (FRE) and Citi (NYSE:C) here)

Last But Not Least...

Technology (Motorola (MOT), Palm (PALM), SunMicro Systems (JAVA)) and financial (Fannie, Freddie, Ambac (ABK), E*Trade (NASDAQ:ETFC)) also account for 70% of the "10 Brands That Will Disappear in 2010" list based on analysis by 24/7 Wall St. Fundamental analysis typically has very little bearing on the market until after a big crash; nevertheless, one should take notice when both fundamental and technical are sending out similar warning signals. (On a side note, some of the 10-to-disappear acts might be worth investors' consideration as they could be potential M&A targets.)

With global recovery still on shaky ground, corrections, fundamental or technical, from three market sectors, occurring in the first half of the year, as foretold by BarCap charts, could easily dip us right into a W faster than you can say recovery.

Quote of the Segment:

"Direction comes from America, leadership comes from abroad."

Video Source: CNBC

Disclosure: No Positions