The Great Consolidation

Includes: EWI, EWP, FXI, INP
by: Lance Fiasconaro

The bigger the base, the bigger the break.

Well, it turns out it wasn't the second Great Depression after all. Instead, what we've seen was a Great ... Consolidation in global markets. And it's ending.

Italy hasn't descended into the Mediterranean. China hasn't had a hard landing. And the euro currency hasn't collapsed. There was no Lehman moment.

European and emerging markets have underperformed the S&P 500 by a significant margin since the 2009 reflation trade topped on April 29, 2011. They are now showing significant outperformance. Spanish and Italian stock markets reached their ultimate bottoms on July 24, before breaking out on August 16, at which point I issued a strong buy signal via Twitter. The euro currency broke out on September 7, after the European Central Bank announced a new bond purchase plan. Emerging markets should break out soon.


Chinese and Indian stock markets are completing a consolidation dating back to 2007, manifested as contracting triangles in the FXI and INP exchange-traded funds (ETFs).

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The NASDAQ-100 appears to be breaking out of a consolidation dating back to the dot-com bubble. Until recently, the index was retracing a similar pattern seen in the Dow Jones Industrial Average during the Depression era.

NDX 100
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The euro currency is tracking a bullish inverted head-and-shoulders bottom when examined on a monthly chart.

Euro currency
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Many economic-sensitive stocks are near their 2009 lows, providing investors with a "second-chance" double bottom. Short interest on the NYSE Composite recently touched a Fibonacci five-year high. Given that the world has not ended, short sellers are likely to buy back shares in order to cover their losses, sending equity prices higher. We are well positioned for the short squeeze of a lifetime.

As markets are discounting mechanisms, they often anticipate events that never actually occur. Equity valuations in peripheral Europe suggest that some markets discounted a complete dissolution of the eurozone, which could happen eventually, but definitely not tomorrow, as markets priced in. As such, I expect the current reflationary "race-to-buy" environment to persist for the foreseeable future. Investors expecting to "get in on a pullback" are likely to be left in the dust and forced to pay higher prices or miss the boat.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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