MDM - Model moves to CASH/NEUTRAL on June 24, 2013

Published : June 24 2013 at 9:32 ET

The MDM has moved to a CASH signal. Friday's bounce was anemic. Further, June buy signals have a particularly bad track record in both IBD and MDM. Price/volume action in the major indices and leading stocks remains under pressure with the NASDAQ Composite and S&P 500 both trading under their respective 50-day moving averages, and the VIX has spiked to its highest level this year.

Adding to the pressure is China's Shanghai Composite index which plunged 5.3% to 1,963.24, led by bank stocks. It was the first close below 2,000 since December, and the percentage drop was its worst since a 6.7% fall in August 2009. The drop was due to  concerns that Beijing may be reluctant to ease a liquidity crunch in the Shanghai interbank money markets. Consequently, short-term interbank interest rates in Shanghai hit record highs last Thursday.

“The worst of the liquidity crunch may now be behind us, but we believe interbank rates will stay at elevated levels until at least the second week of July,” said Standard Chartered China economist Stephen Green.

“The longer this policy lasts, the more concerns about banking-sector stability will be raised. It may also cause slower credit growth in the second half,” he said.

While MDM is giving more room for minor market corrections due to the market finding a floor due to quantitative easing, it is also picking up more selling pressure here thus will switch to a cash signal. It finds in this QE-challenging environment that it could quickly switch to a sell should the pace of selling continue to increase. However, it could also quickly switch to a buy once it senses the market finding a floor and thus bouncing from oversold back to a QE-induced uptrend.

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