Over the past week, the "risk on" trade has taken a back seat and it appears as though the counter-trend rally has run out of steam. During this recently concluded advance, most stock indices and commodities found resistance around the 200-day moving average and have failed to stay above that critical level.

During a primary downtrend in the stock market, prices tend to stay below the 200-day moving average. Moreover, primary downtrends are characterized by a downward sloping 200-day moving average. At present, the majority of the stock markets meet these two conditions and this leads us to believe that the path of least resistance is down for now. Furthermore, the world's fever chart (US Dollar Index) is in an uptrend, and this is another confirmation that all is not well in the financial markets.

As far as the economic "news"- or noise - is concerned, things are rapidly deteriorating in Europe. However, investors are still hopeful that somehow, policymakers will save the day. Across the pond in the US, recent economic data has been marginally positive, but historical retail sales cannot tell you anything about the future. Although Wall Street wants you to believe that economic growth is accelerating, the world's leading authority on business cycles, the Economic Cycle Research Institute (ECRI), does not share the same enthusiasm. For instance, the ECRI has recently reiterated its recession call and it believes that an economic contraction is inevitable. Interestingly, the US Federal Reserve economists have also raised their odds on a recession.

Over in the energy market, oil has been the strongest of the lot. Earlier in the week, NYMEX crude was trading above $100 per barrel, however, over the past couple of trading sessions, it has fallen sharply. You may recall that during the last recession, the broad stock and commodity markets peaked in October 2007, whereas oil continued to rally until mid-2008. During this business cycle, crude oil has demonstrated the same resilience and this is largely due to the prevailing supply and demand imbalances underpinning this commodity. Peak Oil notwithstanding, if the global economy slips into another recession, the oil price will probably deflate. Thus, this rally may be a good time to exit the sector.

Turning to precious metals, both gold and silver fell sharply on Thursday. Currently, silver is looking weaker than gold and this is to be expected during times of economic stress. Both gold and silver have once again fallen below key support levels and this suggests that lower prices are on the horizon.

In the forex market, the world's reserve currency is appreciating and this is a major red flag. If all was well in the economy and the financial markets, the US dollar would have been declining. However, this is not the case and as long as the US Dollar Index stays above its 200-day moving average, other currencies will continue to feel the heat. The only exception is the yen, which is currently in demand due to a lack of choice.

Finally, the real drama is unfolding in the European bond market.Despite two resignations and two million promises, European bondholders are not buying into the "all is well" story. For instance, on Thursday, Italian and French yields spiked yet again and earlier in the week, Fitch announced that American banks are not immune to the European debt crisis. I continue to believe the ongoing sovereign debt crisis will not be contained. The bond markets are likely to experience some pain over the following months. Thus, instead of chasing yield, investors may want to focus on the return of their capital.

(HK Edition 11/19/2011 page2)