BofA Merrill Lynch(ed) Watches Emerging Markets Equities

All eyes wide shut, as "key levels continue to break", according to the note by technical analysts at Bank of America Merrill Lynch yesterday:

Leadership areas of the market such as Financials, Semis, Transports and Small Cap continue to fall despite short-term oversold readings, likely indicating we now have bad oversold readings on the market. October ends down 2%, and the risk is that November is a down month as well. Our biggest worry is financials, which could fall 20-25% off their highs.

Further on:

The MSCI Emerging Markets Net Total Return Index reached a resistance zone marked by the 61.8% Fibonacci retracement of the October 2007 to October 2008 decline and the prior lows from January, March, and July 2008.

Emerging markets is a market leadership group and the rally from the October 2008 low into this area was nearly 120% for the MSCI Emerging Markets Net Total Return Index.

However, the relative uptrend support line for this index vs. the S&P 500 that has been in place since October 2008 is now under pressure. This uptrend support line reflects the leadership trend for emerging markets and a sustained break would be a bearish sign.

Watch out you too! Click on picture to enlarge, courtesy of BofA Merrill Lynch.

Jeff Saut, the admired strategist at Raymond James, opined cool in the weekly missive yesterday:

For the record, the recent closing price reaction “highs” are 10092.19 for the DJIA and 4045.11 for the DJTA. Measuring from those highs suggests a one-third “give back” would leave the DJIA at ~8910 and the DJTA at ~3412. That would be consistent with our comments in which we stated that we thought any correction would probably be contained between the 50-day moving average (DMA) and the 200-DMA. In the Dow’s case the 50-DMA is currently at ~9718 and the 200-DMA at ~8593, while the Transport’s 50-DMA resides near 3613 and the 200-DMA around 3269. Of course the markets can do anything, but I would be surprised if the Averages correct by more than one-third. Nevertheless, we have been pretty cautious since the latter part of September, fearing that the vacuum created by the July to September melt-up might get “filled” to the downside once quarter-end window dressing is over. Initially that strategy looked good, and then it looked bad; but all said, the Averages are only marginally below where they were when we turned cautious. Yet, we are still cautious.

And he suggested for the week ahead the following:

While our sense is that we are into a secondary correction, our proprietary overbought/oversold indicator is VERY oversold and the number of S&P 500 stocks that are above their 50-DMAs has fallen from more than 90% to 33.2%. Consequently, we continue to think it is a mistake to get too bearish. Ergo, until Dow Theory “tells us” otherwise, we think the primary trend remains UP, and we continue to trade, and invest, accordingly.

Some suggestive action needed? Yet, I am lazy and cautious ...