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Thursday, April 15, 2010

Three signs of a coming equity market correction

Signs are appearing, at least to those who like to study financial market runes, that equities could be in for a short-term fall.

Nothing is certain, of course, what with past performance being no guarantee of future returns as the standard disclaimer reads, but three different historical trends are suggesting equities could soon turn.

It all has to do with eight days in March, an aversion to cash and, contradictorily, falling equity market volatility.

First, the eight days.

Morgan Stanley's European equity strategy team has taken note of the fact that this is the number of times last month that MSCI's main Europe index found itself up at least 50 percent year-on-year.

"This is a rare event," it said in a note. "(It) has happened on only 80 individual days since 1919."

Crunching numbers, the Morgan Stanley team found that while such occurrences are a long-term bullish signal, they are bad news over the short haul.

Some 77 percent of the time, equity markets have fallen 4 percent over the next six months.

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