Further to my musings on whether ‘decoupling’ is fact or fiction, I’d like to briefly point out two of the curiosities of the current global equity rally.

The first curiosity is how out of touch the rally seems to be with the fundamentals. My overall view is that this rally is simply a correction in an overall bear market, because the underlying story is still one of deleveraging, deflation and slower potential long-term growth. That is not good news for stocks in general. But the second curiosity is why liquid markets, and primarily those in developed states, look better on a technical basis than many smaller, illiquid, so-called ‘frontier’ markets, some of which look absolutely shocking. I would include Serbia’s BELEX, Peru’s IGRA Index, and the Viet Nam Index in this category. For example, since peaking at 650 earlier this month, the BELEX has fallen to 565, a drop of 13%, and further losses to 500 (which would be a 23% drop) look more than possible in the near term. By contrast, while markets like the Dow and Nikkei could certainly fall further over the medium term, the potential for short-term drops on the order of one-quarter (putting the Dow back to its 2009 lows in the mid 6,500s, from around 8,500 currently) is not nearly as clear-cut.

The two curiosities may well be related. If I am right on the first curiosity — that the technicals have decoupled from the fundamentals — then there is very little supporting markets in the short term, and this is simply a bounce from oversold conditions. Which gets us to the second curiosity, because if this is a trader’s market, and not an investor’s market, as I have been harping on about since last year, then naturally one would expect the markets that favour traders to see more investment than those that favour investors.

Put another way, if the long-term global macro fundamentals were truly good, then long-term investors would be putting their money in the location of their mouths. Markets such as the IGRA and Viet Nam Index are not nearly as deep or liquid as the FTSEs and Dows of the world, so if you get into them, it is more than likely that you intend to be there for the long term. In other words, the fundamentals have to be right, since once you’re in, you’re in for the long haul. While a bounce happened initially — the Viet Nam Index at one point had bounced as much as 120% from its lows — the technical pictures are starting to look bleak once again. In fact, Business Monitor International‘s Latin America desk today went outright bearish the IGRA, which looks ridiculously overextended on the upside.

Just a theory, but frontier markets may be the canary in the coal mine for global markets, so if we see them decline sharply — as the technicals tell us they can — then it may serve as confirmation that the underlying fundamentals are not nearly as good as the major equity indices’ rally would suggest.