Full House - Time to Fold?
Economic prophecies have a way of being self fulfilling. On June 4, Morgan Stanley’s Chief European equities strategist Teun Draaisma issued a “Full House Sell Signal” based on three leading indicators - higher bond yields, higher new orders from manufacturers, and valuation/risk indicators. Ominously, this same sell signal has appeared only five times previously; the dates were in in April 1981, September 1987, February 1990, May 1992, and April 2002. In each case the market dropped 15% within six months.
Which came first, last week’s warning or the sell off? While the warning applied specifically to European markets, that didn’t stop U.S. markets from reacting, if indeed they were just reacting to the news. As already noted, a strong correlation now exists between different markets.