Back on April 15th I wrote that: 'the S&P 500 is overbought over every measurable timeframe and the momentum in market breadth is deteriorating. The CBOE Put/Call ratio (a contrarian sentiment measure) at 0.32 has hit its lowest level since 2004, while the Vix Index has reached levels last seen when the market topped out in 1998 and 2000. I'd still foresee significantly higher volatility and therefore higher risk aversion over the next few weeks and into Q3.  Monthly, weekly and daily momentum indicators are topping out and/or posting non confirmations. It suggests that further upside will be limited, whereas the risk of a significant intermediate correction is increasing, and it will be significant, in the order of 15% plus, mirroring the 1994 and 2004 experience'.  On just one morning this week investors have had to cope with rumours of a Europe-wide short-selling ban, an unexpected jump in American initial jobless claims, exceptional volatility in currency markets as hedge fund carry trades unwind (look at the spectacular AUD/Yen collapse); and a seemingly relentless selloff in  equities. When I predicted this imminent burst of volatility last month and a deep market correction, it was hard to imagine the extreme rush to liquidity we've seen in recent weeks.  

So is the global recovery stuttering? Is deflation looming in the US? No, investors have suffered one of their periodic manic-depressive epsiodes and not much has really changed in the real world. Certainly, leading indicators are losing momentum as is typical at this point in a recovery but the risk of a renewed slump into recession is negligible; the endless squabbling among euro zone governments hasn't helped soothe nerves, but Europe has been an incoherent political mess for ever, and its citizens and companies just get on with life. Germany has  ratified its share of the euro zone's €750bn stabilization package, the US finance bill has passed its Senate vote, so at least some uncertainties that have unnerved investors are abating. The Advance/Decline index on the NYSE has hit the extremes of the last 20 years while a mere 7% of stocks are now above their 50-day moving average, a feat not equalled since March 2009. We've swung from complacency to dread in a few weeks, and neither are justified.  A CNBC poll this week found that 38% of respondents believed the Dow is headed to 5,000, or half current levels (overexposure to media hound Nouriel Roubini and those Elliott Wavers is bad for your rational faculties). We should bottom imminently, and with hedge fund balance sheets now liquid to an extent not seen since late 2008, the scope for a sharp rally in risk assets like oil, resource equities and the AUD and a sharp selloff in the Yen, gold and short term bonds, is high over the summer.  The point about investing is to remain disciplined and rational, and recognize that much of what happens is anything but; the markets are an emotional barometer as much as an economic discounting machine.

There is plenty of great value apparent after the shakeout, from Japan to oil service stocks (in