Thursday, June 07, 2007

Warning: Full House sell signal

Morgan Stanley has advised clients to slash exposure to the stock market after its three key warning indicators began flashing a "Full House" sell signal for the first time since the dotcom bust. Morgan Stanley warns the 'mid-cycle rally is over'. The triple warning was a "very powerful" signal that had been triggered just five times since 1980. "Interest rates are rising and reaching critical levels. This matters more than growth for equities, so we think the mid-cycle rally is over."

Our model is forecasting a 14 % correction over the next six months, but it could be more serious," he said. Mr Draaisma said the MSCI index of 600 European and British equities had dropped by an average of 15.2% over six months after each "Full House" signal, with falls of 25.2pc after September 1987 and 26.2pc after April 2002. "We prefer to be on the right side of these odds," he said.

Today registered a 90% down day. These usually don't come alone, they tend to come in a series of two or more 90% down-days. Thus, it should not be surprising to see more rotten action ahead, although the Dow has already lost 410 points in only three trading days. Thus, the market could be in for a rest, but I do think it's going lower than today's close.


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