To this point, the selling in the equity market has been held to just the US. While one would expect that the markets around the globe would react negatively to the recent downdraft in the US, it has happened to this point. A failure for critical markets like China, South Korea, and Germany to maintain their strength could give us some clue as to how much more downside may exist here in the US.
1. South Korea
For example, the has underperformed the since the beginning of September. These two markets have been positively correlated since early February.
Also, the German has underperformed the S&P 500 for some time. It could indicate that the S&P 500 needs to play catch-down to the DAX, or that the DAX is still telling us there is something different taking place between the two markets.
These global markets must be monitored. At this point, the global markets suggest that the selling pressure has been contained strictly to the US and doesn’t have a broad international feel to it. A global move lower in equity prices would suggest and be supportive of something more profound taking place to the downside here in the US. At this point, we can’t say that we have a global sell-off taking, which depending on the outcome you want, can be good or bad. Good, if you are bull and searching for a bottom in the market, and bad if you are hoping for or looking for a deeper correction.
Again, at this point, we haven’t seen fear levels spike here in the US in a meaningful way, and that suggests that the selling pressure still has to build more. But, we would also look for confirmation of global selling pressure. The bottom line is that gauging this current correction is not easy.
3. US 10-Year
Additionally, there has been very little if any flight to safety witnessed in the bond market, with yields on the US hardly budging all week.
Additionally, the has been stuck below 93.50 and, to this point, unable to break out. Typically, in a risk-off environment, we would expect to see the dollar strengthen and 10-year yields fall.
How the market moves forward from here is very important, and the clues we get from other “parts” of the market are critical. If the global market remains strong, while the dollar and yields lack a flight to safety quality. It could indicate that the sell-off is likely not to grow much worse.
I tend to have expectations that selling will make its way around to other parts of the world, and we should start to see a flight to safety take place, given the overstretched valuations here in the US. But we will see, this week will fill us in a lot of these details.