Stock markets resumed their declines after more evidence of a global slowdown emerged following the release of poor German industrial production. Markets had been unsettled by weak economic data, the latest news coming from Germany added to the bearish tone. The US stock market fell 1 percent.
Furthermore the IMF cut its global economic growth forecast. We are in a situation where bad news is bad news because sentiment is bearish. Remember, sentiment as indicated by the BTI has been bearish since September. During a period of bearish sentiment investors will sell stocks on weak economic data, this is what I call bad news is bad news. Now, there are situations where bad news is good news and this happens when sentiment is bullish.
When sentiment is bullish people will take the bad news as good news, for example if the economy is weak people will anticipate lower interest rates and this is good news so they will buy. Basically when sentiment is bullish investors interpret the news differently, if the news is bad and they are bullish they will find an excuse to buy and the market will rally.
So the real reason why markets are falling is because sentiment is bearish, there is no reason to buy. The Top 20 Differential is no longer oversold but a continuation of the decline will probably push this indicator to oversold which means the FTSE 100 is near a bottom. Downside is limited, soon the FTSE will find a bottom and the index will rally.