The market action in the past week has provided enough evidence to confirm that global stocks and commodities are in a primary downtrend.

It is notable that during October's sharp rally, many stock markets tested the 200-day moving average, but they failed to climb and stay above that critical level.Instead, prices fell promptly and all the stock markets - with the exception of the Philippines Composite Index - are currently trading below the 200-day moving average.

Furthermore, the 200-day moving average for various stock and commodity markets is also declining and such behavior is typical of a primary downtrend.

At this stage, nobody knows when the ongoing downtrend will end, but the looming recession suggests that selling pressure could persist for several weeks. During this downtrend, US indices have held up better than their European and Asian counterparts, but it appears as though Wall Street's wheels are starting to come off now. Over the past four trading sessions, the S&P 500, Dow Jones Industrial Average and NASDAQ have lost approximately 5 percent of their value and if the October lows are taken out, the selling will probably intensify.

Over in the energy complex, the price of crude has weakened over the past week and this is in line with my expectation. With many of the world's prominent economies slipping into recession and credit strains emerging, the price of oil is unlikely to stay strong. If my analysis is correct and the economic contraction intensifies, the price of crude will probably decline over the following weeks.

Turning to precious metals, both gold and silver are looking weak.Currently, gold is holding up better than silver and this is to be expected during a contraction. If the US dollar continues to rally and climbs above its recent high, both gold and silver will depreciate in value. Despite what the 'gold bugs' claim, the reality is that during a big contraction, the price of gold also feels the heat and this time should be no different.

For sure, gold may outperform other 'risky' assets by declining the least; but I do not see the point of owning a depreciating asset. If this downtrend turns ugly, silver will really take it on the chin, so I do not recommend exposure to the white metal for now.

Finally, in the world of money and bonds, the world's reserve currency is appreciating and the trend is clearly up. If the US Dollar Index climbs above the 80 level, panic buying may follow and other major currencies will probably see significant outflows. The only exception may be the yen, which is still in an orderly uptrend versus the US dollar.

Last but not least, the ongoing risk aversion trade is benefiting US Treasury securities and as long as this deflationary downtrend persists, investors will continue to turn to this asset as a 'safe haven' trade.

(HK Edition 11/26/2011 page2)