BCA Research posts their US equity capitulation index which suggests that equities are entering deeply oversold territory. Can Europe get its act together? Today’s New$ & View$ provide clues to this question.
In the short term, a rally in risky assets is possible. However, the durability of this rally depends on a clear solution to the euro area debt crisis and the performance of the global economy.
Most of our market indicators and our timing model are calling for a rebound in risky assets. For instance, the Capitulation Index for the S&P 500 is at a one-and-half-sigma undershoot. The corresponding index for the euro area stocks has plunged to levels similar to the early 2000s. In addition, the insider sell/buy ratio, bullish sentiment and breadth have all plunged to levels consistent with a cyclical market bottom. Meanwhile, the biggest risk today is whether Europe can get its act together. A credible plan with both ample sources of funds and ECB participation would lessen risk aversion, sending stocks higher. On the other hand, continued political bickering could lead to a bank run and a nasty selloff in stocks. As a result, our Global Investment Strategy service expects that hope and fear will buffet equity prices, with the S&P 500 oscillating wildly.