Stock Take

S&P CORRECTION:The S&P 500 has fallen for six consecutive weeks. A lower close this week would take that losing streak to seven, something that's only happened three times.

Many commentators are spooked, remembering that the last six-week run occurred just months before Lehman’s fall. However, this has been a slow bleed, not a haemorrhage. Three of the six weekly falls were minute, with declines of 0.16, 0.18 and 0.34 per cent. There has been no spike in the VIX, the so-called panic index.

A Goldman Sachs note examining the anatomy of market pullbacks found there were 13 sell- offs of at least 5 per cent during the bull markets of 2003-07 and 2009 to the present. Only once, during spring 2010, was a double- digit fall recorded, and new highs were soon seen on each occasion.

The S&P 500 remains above its widely watched 200-day moving average, which may come into play soon. Unless that is lost, bulls will see this as just another minor correction.

INVESTOR BEARS:Retail investors are more bearish than at any time since August but Bank of America-Merrill Lynch's latest monthly survey of fund managers indicates that professional investors are cautious rather than capitulating.

Global fund managers have upped cash positions to their highest levels in a year but also remain overweight in stocks. Nearly two-thirds do not expect another round of quantitative easing in the US, while the consensus is that the global economy is in “mid-cycle” but edging towards “late cycle”.

Potentially “premature fiscal tightening” was the second-biggest concern (12 per cent) among investors, with the Chinese property market (11 per cent) and commodity price inflation (9 per cent, down from 16 per cent in May) also exercising minds.

The big worry, however, remains Europe – 43 per cent see Europe’s debt crisis as the main risk facing global markets.

HOW LOW CAN GREECE GO?Having been downgraded by Standard Poor's this week, Greece is now the lowest-rated sovereign in the world. Two-year bond yields surpassed 25 per cent this week, while the cost of insuring against default set yet another record.

So presumed is a default that Brown Brothers Harriman this week issued a note entitled The Day After Greece Defaults. Markets have prepared for the “direct cost” of default, it says, but the real cost lies in the resulting uncertainty. “An unmanaged default” could see Ireland and Portugal “succumb to disorderly processes”.

Soaring bond yields, euro volatility, forced asset sales to plug in bank capital ratios, market liquidity drying up – it’s a Lehman- like scenario and the strategist assumes policymakers will have ensured by the end of June that default is avoided, for now at least.