EJFQ Analysis | Long-term market volatility accelerates, global stock markets at risk

As March comes to a close, the shadow of conflict in the Middle East looms, and global stock markets have been under pressure throughout the month. The MSCI World Index, which tracks the performance of 47 developed and emerging markets, has dropped 7.14% from its peak (calculated at closing prices, same below), and its long-term market breadth (the percentage of stocks above the 200-day moving average) has plummeted from over 70% to 52.53%. In simple terms, within less than a month, about one in five stock markets has fallen below its long-term trend line, demonstrating that the overall support for risk assets is weakening.

If we further observe the extent of price corrections, the internal pressures within global stock markets are even more concerning. Currently, half of the stock indices that are still above the 200-day moving average have dropped more than 10% from their 52-week highs, entering the technical “correction zone”; some have plunged around 20%, crossing the threshold into a “technical bear market.” In fact, the Turkish and Indian stock markets have seen declines of 9.65% and 14.18%, respectively, while the stock markets in Indonesia and South Korea have both once fallen by over 20%.

The 200-day moving average has always been regarded as the “dividing line between bull and bear markets,” essentially reflecting the average cost of holdings over the past year. It is an important watershed for measuring the long-term trend of the market. When the index stabilizes above this line, it generally indicates that the stock market is still in an upward trend. Historical backtesting of various stock markets, including the Hang Seng Index, has also confirmed that a simple strategy of “holding when above the 200-day line and exiting when below” often yields better risk-adjusted returns than the “buy and hold” strategy. In other words, the long-term market breadth of global stock markets is not only a technical indicator but also a broad gauge of risk appetite; a declining ratio suggests that the overall market base is weakening, and market sentiment is shifting towards caution or even pessimism.

To reduce market noise, the use of weekly average data actually provides more accurate signals. As seen in the attached [chart], the long-term market breadth of the MSCI World Index has historically declined from high levels and fallen below the 50% strength threshold, resulting in more than half of the stock markets failing to maintain their 200-day moving averages, with the structural decline becoming clearer; should it fall below the 40% mark, it typically accompanies widespread and synchronized adjustments in risk assets. Similar situations have occurred during the European debt crisis in 2011, the global stock market decline in 2018, and the liquidity tightening cycle in 2021, generally coinciding with significant corrections in all major benchmark stock indices.

Of course, like the Relative Strength Index (RSI), the long-term market breadth has “oscillating indicator” characteristics, meaning that when the ratio falls to lower levels, such as 10% or even close to zero, it often indicates excessive selling, with the majority of the market in a downward trend, potentially brewing a technical rebound. Therefore, this indicator also holds certain contrarian reference value in extreme ranges.

In summary, the recent peak of the MSCI World Index has turned downward, and the long-term market breadth has similarly plunged, gradually approaching the midpoint. If it falls below the critical thresholds of 50% or 40%, the downward trend is likely to become clearer, and major stock markets may face significant selling pressure at any time. Given that geopolitical risks have not fully dissipated and there remain uncertainties regarding energy prices and inflation expectations, monitoring whether this long-term market breadth can stabilize will be an important tool for assessing whether this round of adjustments is merely a temporary fluctuation or will evolve into a mid-term trend reversal.

Hong Kong Economic Journal Investment Research Department

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