Time to sell on strength

Author Cam Hui

Posted: 20 May 2012

Last week, my Asset Inflation-Deflation Trend Model flashed a deflation signal, indicating a position of defensiveness portfolios. Out of respect for our clients, I waited a few days before posting the update on my blog here.

As regular readers know, the Trend Model relies primarily on commodity prices as the canaries in the coal mine to determine the global growth and inflationary expectations and therefore environment for the risk on/risk off trade. The picture for commodities has been indeed weak.

Not only has the news flow from Europe been negative, but the signals out of China has also been weak. Consider, for example, this analysis from BAML’s China economists (via FT Alphaville) which showed data well below expectations across the board:

There is also anecdotal evidence that China’s real estate market is unraveling. Even here in Vancouver, where we have seen considerable amount of Mainland Chinese money pouring into the residential property market, Vancouver housing is start to look soft.

All in all, it’s starting to look ugly intermediate term.

Wait for the relief rally
In the short-term, however, stock prices are highly oversold by virtually all measures and sentiment models are at bearish extremes, which is contrarian bullish. My favorite overbought/oversold model is flashing an oversold reading, which should be good for a 1-3 week relief rally soon.

For investors who were caught by the sudden downdraft in the price of risky assets, I would suggest that they wait for the inevitable rally and take that opportunity to lighten up their positions to reduce risk. Traders whose missed this move will likely find that it’s too late to get short. I am seeing extreme oversold readings across the board, not just in stocks, but in my inter-market analysis such as the chart below of the relative returns of SPY vs IEF. If you get short here, you are liable to get your face ripped off in a counter-trend rally.

Looking longer term, I expect that the next few months will be volatile but the markets will have a downward bias.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


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