04/12 Indices, page-159

I was away for the past week, hardly looked at the market. I was pleasantly surprised when I did start updating all my records yesterday that the ASX had a great week. XJO up +1.72% for the week. That's after my gloomy review last week - which was clearly askew.

Much of the gain this week was due to a strong showing on Wednesday when XJO was up +1.65% which followed on from the RBA's decision to hold interest rates steady at their meeting on Tuesday.

Here's the daily chart for STW - (an ETF for the XJO).

Well - the XJO had a great week - and, the technical picture is looking good for a Santa Rally.

STW shows a clear Inverse Head and Shoulders Pattern. Using a standard measure rule for H/n/S Patterns, this looks like another +5% in the offing.

The problem with H/n/S patterns is that the break up through the Neckline often occurs as the instrument approaches an overbought status. That's the case now. Plus - we have a negative divergence on the MACD and Force Index. Our market could be in for a pause or some pull-back.

While the XJO was up strongly this past week, the American market was more sanguine. SP500 was up just +0.2%. As a result, American investors became a little more realistic in their views of the stock market.

AAII Investors Sentiment.

The percent of Bearish Investors surveyed by AAII rose from 19.6% the previous week to 27.4% this week. That's not a huge jump but gets closer to the historical average of 31%. That suggests that the American market has some hope of continuing its bull run in December.

Australian VIX

The above chart from Market Index shows the Australian VIX over the past 20 years. It kicked up just a little this week - but remains near 20-year lows.

That continues to give me a prickly feeling at the back of my neck - whenever the market is heavily skewed one way or the other - we usually get reversion to the mean. In which case we would see a reversion from highly unusual low volatility to much higher volatility, i.e., lower markets.

This may not be a great timing device but should remind investors to be on guard against extreme complacency.

Sector Performance this Week.

Nine sectors were up this week, with two down.

Energy (XEJ) was very weak again this week as it has been in recent weeks. XEJ down -1.3%. Utilities (XUJ) was down a little -0.11%. XEJ got a lift at the end of the week as a result of talks about a merger between Woodside and Santos. Those talks saw Santos soar +6.15% for Thur/Fri. But Friday saw plenty of intra-day selling, so the surge higher may not hold.

The best performer was Property (XPJ) which is interest rate sensitive sector. XPJ up +3.53%. XPJ has, in recent weeks, gone from being a basket case to the ASX best performer. That's because of an expectation that interest rates in Australia are on hold and likely to fall in 2024.

The surprise packet this week was Staples (XSJ) up +2.59% - no doubt benefitting from the interest rate pause and expectations of a good seasonal result coming into Christmas and New Year.

Sectors - State of the Trend.

If I use the Three Supertrends as criteria for judging the trend in each sector, this is how the trends shape up at the end of the week.

1. Bullish: Last Week - XXJ, XIJ, XHJ, XNJ. This Week - XNJ, XMJ, XXJ, XPJ, XHJ, XIJ, XSJ, XDJ, XTJ
2. Neutral, i.e, trend may be changing: Last Week - XDJ, XTJ, XSJ, XPJ . This Week - XEJ, XUJ
3. Bearish: Last Week - XDJ, XTJ, XSJ, XPJ. This Week: None
   

We now have a very strong market. Nine sectors are bullish, two are neutral, and no sectors are bearish. What could go wrong? hmmmm.

NH-NL Cumulative

NH-NL Cum is usually a good medium to long-term indicator. It is useful for long-term investors to keep them in or out of the market depending on the prevailing trend.

Now - here is a conundrum. XJO is up >5% since the beginning of November. NH-NL Cum is stubbornly sliding sideways during that time. That's difficult to understand while the ASX is having a strong up trend.

This chart has kept long-term investors out of the market during the past five or six weeks while the market has gone up considerably. NH-HL Cum tends to be a lagging indicator, but this appears highly unusual for such a long period of time. Maybe its due for a massive upside move through December. We'll have to wait and see.

Large Cap Stocks (100 Leaders) above key Moving Averages

• % of Large Cap stocks above 200-Day MA. Last week 43%. This week 50%.
• % of Large Cap stocks above 50-Day MA. Last week 60%. This week 72%.
• % of Large Cap stocks above 10-Day MA. Last week 64%. This week 78%.

Unlike NH-NL Cum, Stocks above key MAs have made steady improvement.

This is where things gets interesting:

This chart is a bit of a dog's breakfast, but one notable factor standing out is the figure "81%" which occurs three times in 2023. That represents Stocks above the 10-Day MA. Once that figure gets above 80 %, the market tends to slump, i.e., that's a key overbought figure. That doesn't mean that some serious reversal happens, but the market does tend to ease back.

The current figure for Stocks above 10-Day MA is 78%. That's not far off the magic number of 81%. Given the momentum in the market we could expect the figure of 81% to come up next week. Just in time for people to start thinking that the end-of-December Rally (Santa Rally) isn't going to happen this year.

Conclusion.

The Australian market is bullish. There doesn't appear to be any nasties showing up in current figures - except, perhaps, too much complacency and the market may be getting to an overbought state.

But - in a broad brush picture, there seems to be no reason why the current rally shouldn't continue into Year's end and into early January. The trend is up - stay with the trend.