"The possibility of a severe fall in the stock market is now very high," warn technical analysts at HSBC, who have dialed up the bank's outlook for U.S. stock markets to "red alert" following an aggressive wave of selling.
The warning heightens the note of caution in HSBC's tone from a September 30 report in which the bank issued a lower rated "orange alert", pointing to similarities between Dow Jones (Dow Jones Global Indexes: .DJI) Index trading patterns seen just prior to the 1987 "Black Monday" stock market crash and now.
HSBC contends the "head and shoulders"
shape - a visual representation of price trends which are seen to
signify the approach of a market top – is currently in evidence for the
industrials-focused index, saying the pattern has recently been tested
and re-tested.
The
report described Wednesday's sell-off as "broad-based" and as
demonstrating "intense selling pressure", both factors in its decision
to crank up the alert level.
The
note highlights 17,992 points for the Dow and 2,116 points for the
S&P 500 as the critical pivot points to watch for signs of a broader
capitulation.
"As
long as those levels remain intact, the bulls still have a slight hope.
But should those levels break and the markets close below (which now
seems more likely), it would be a clear sign that the bears have taken
over and are starting to feast," the note, authored by Murray Gunn, head
of technical analysis, said Thursday.
While
this bull market has often been called an unloved rally, characterized
by a lack of conviction in the strength of its fundamentals and
frequently said to be the outcome of an abnormal investing climate
shaped by central bank tinkering, not everyone agrees the market has yet
peaked.
Speaking
to CNBC on Wednesday, William Hobbs, head of investment strategy for
the U.K. and Europe, sounded a note of caution about misreading signs.
"People
are mechanically now looking for reasons to turn negative. And for us
actually that probably means there's opportunity still as we're not
having a fair and balanced debate about the fundamentals of the market,"
he said.
Along
the same vein, Kleinwort Benson's Chief Investment Officer, Mouhammed
Choukeir, rang a skeptical tone over the contention markets are now
peaking.
"Market
tops are characterized by euphemism and euphoria and we're clearly not
there. Valuations are potentially extended but from a sentiment
standpoint this is not what you see at the top of the market. You
usually see a surge in IPOs (initial public offerings), M&A (mergers
and acquisitions), there's this optimism about the economy and the
markets as a whole, earnings expectations are on the rise. That's not
the environment we're in," he told CNBC Wednesday.
And
indeed, Choukeir interprets the lack of enthusiasm in many pockets of
the investing world as a positive factor for those intending to stay in
the game.
"That's
a cause actually for optimism as an investor to be contrarian and go
against the mood. That's what we've been telling our clients, to stay
with it," he added.
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