The Australian market has been down for eight weeks in a row. Since the high on 1 Nov., 2007, the All Ordinaries Index (XAO) has lost over 27%. The average bear market loses about 30%. The Americans have only just gone past the 20% decline – trumpeted ad nauseum by media sources as AN OFFICIAL BEAR MARKET.
Barron’s this week heralded the news with a front cover depicted a big grizzly bear and the caption BEAR MARKET. Contrarians have long asserted when such front covers appear that they point to an approaching reversal to the upside. We shall see.
More Doom and Gloom poured out of the world’s media sources.
• Last night, the headlines in America read: IndyMac taken over. IndyMac is a medium sized savings bank based in California which specialised in loans to borrowers with poor credit ratings. It will reopen on Monday after being taken over by Federal Deposit Insurance Corp. as the IndyMac Federal Bank. • The media continued to report rumours and assertions that Freddie Mac and Freddie Mae (the biggest providers of home mortgages in America) were insolvent despite announcements by the banks and the head of the American Federal Treasury that the corporations were financially sound and would continue in their present form. • The U.S. trade deficit narrowed. • Consumer confidence in the U.S. remained near lows set back in 1980. • Oil hit new highs, again • Bank of England left rates on hold. • Base metals soared after stockpiles in the London Metal Exchange reached low levels. • Jean-Claude Trichet, the head of the European Central Bank, recovered from his attack of dovishness last week, put his gorilla suit back on and stated that inflation was a continuing concern; i.e., rate hikes could be on the table again.
In Australia, it was the usual tale of two economies:
• Consumer Confidence plunged to a 16 1/2-year low in July, as rising food and fuel prices continued to bite. Commentators then suggested that interest rates were on hold. • The employment figures showed that the country added 29,800 new jobs when economists had expected the creation of only 10,000. The unemployment rate fell from 4.3% to 4.2%. Commentators then suggested that interest rates might have to rise in August. • Housing construction declined for the fourth consecutive month and demand for home loans fell 25 per cent in the four months to the end of May. Commentators then said that interest rates must fall if Australia is to avoid a recession. (Oh well, I guess we have to wait for the CPI numbers in late July before the next move in commentators’ opinions about interest rates.) • The Australian Stock Market (All Ordinaries Index) hit a two year low and hovered just above the psychologically important level of 5000. • Meanwhile, back in Circus Central, Brendan the Bold dithered, hithered and thithered on an Emissions Trading Scheme. Krudd the Krool (blow torch under one arm, Penny Dreadful under the other) set off to save the Barrier Reef, the Murray Darling and everything in between with an Emissions Trading Scheme. Western Australia is doing well – they’ve got mines which supply much of the world with the CO2 fueling Global Warming. They don’t need saving. (Is the politically correct term “Climate Change” or “Global Warming”? I forget which one is which. Doesn’t matter which one you use, the ice still melts.)
Looking to the American stock markets, the three most important broad-based indices (NYSE Composite Index, S&P500 Index and the Nasdaq Index) fell further below the over-sold threshold of 30 on the Bullish Percent Indicator. The figures are:
NYSE Composite: 27.38 S&P 500: 27 Nasdaq: 25.98
That strange antediluvian beast, the Dow Jones Industrial Average, is at 16.67.
The Bullish Percent Indicator is rarely referred to. It is one of the older indicators and is based on Point and Figure Charts. It is also one of the more reliable indicators. A drop below 30 followed by a rise above 30 usually signals the end of a retracement. If this coincides on all of the broad based indices it is a highly reliable signal. I’ll be watching it closely.
Money Supply provides the energy for a stock market rise. As measured by the M2, money supply is at the low end of its range for the past couple of years. Given the credit crunch, this is not surprising.
New Lows on the New York Stock Exchange and the Nasdaq are still increasing in number. A week of decrease in the New Lows usually precedes a rise in the Indices, so there is no leading indicator for an increase.
Paradoxically, the AD Volume (the volume in Advancing Issues over Declining Issues) as measured by the 5-Day Moving Average has been increasing. This is usually a bullish sign. But nothing seems to be working according to historical precedents in the current climate.
. . .
Most indicators I look at are severely oversold at this stage. They have been reading “oversold” for some weeks. A bounce is overdue. The Index (XAO) is now at the last level of support. If that fails, we could be headed for a “crash”.
The Indicators
The All Ordinaries Index (XAO):
• The daily MACD is negative and below the centre line. This, when combined with the break below the up trend line from the March low, provided a “lighten up” signal for active investors. • The weekly MACD has turned negative (this is the “master signal). Anybody still in the market after previous “lighten up” signals should now be out of the market. But be prepared to enter on a positive turnaround • Weekly Slow Stochastic has been heading down for weeks. It is now reading 12.52, up from last week. So there is a positive divergence between this indicator and the index. This suggests a bounce. • The daily Slow Stochastic readings for the past eight weeks have been: 89, 21, 25, 20.4, 17.3, 20.2, 37.33, 15.5 and 29.81. The trend in this indicator is now up. This again supports the idea of a forthcoming bounce. • Weekly RSI is now at 31.53. This is showing a positive divergence from the XAO. The low reading for the Weekly RSI at the March Low was 25.14. The RSI is not confirming the current low on the XAO – another indication that a retracement may occur • Readings for the daily RSI for the past seven weeks have been 73, 55.5, 47.7, 43.3, 37.3, 35.31, 34.84, 32.67 and 32.771. This is the first time that momentum has turned upwards. A barely discernible movement – but at least, after eight weeks, the trend down has steadied.
In the past few weeks, the charts have given seven down trend signals:
1. The weekly Slow Stochastic had a negative crossover 2. The daily RSI broke below its up trend line. 3. A negative divergence appeared on the On Balance Volume. 4. The daily MACD had a negative crossover. 5. The uptrend line on the daily chart crossed to the downside. 6. The XAO crossed below the support lines at 5700, 5600 and 5400. 7. A drop below 5200
The drop through 5200 suggests a test of the next support level of 4800/4900.
5200 now represents a formidable barrier for the index. A break above that level would be an important catalyst for further rises. In the meantime, the trend is down – and the trend is the trend is the trend. Don’t buck the trend.
50 Leaders
The situation in the last report was:
Twelve stocks were positive on the weekly MACD (24%). Two of these were positive on both the Weekly and the Daily MACD (4%).
• This week eleven stocks are positive on the weekly MACD (22%). Three of these are positive on both the Weekly and the Daily MACD (6%). The stocks registering positive readings on both the weekly and daily MACDs were: o ASX (Australian Stock Exchange), CBA (Commonwealth Bank) and QAN (Qantas).
This is a small, diverse group. It is significant that no mining or energy stocks are present. These have been the mainstay of the Australian market in the current bear market.
Last week FOUR stocks were above their 50-day moving average (8%). This week we still have FOUR stocks above their 50-day moving average (8%).
Looking at Stocks above their 10-Day Exponential Moving Average, the results for the last nine weeks have been 42 stocks (82%), 19 stocks (38%), 15 stocks (30%), 23 stocks (46%), 7 stocks (14%), 12 stocks (24%), 10 stocks (20 %) and 22 stocks (44%) . This week 15 stocks (30%) are above the 10-day average. Although fewer in number than last week (affected by the big one day move last Friday), the trend here may be changing to the upside.
Last week NO stocks were positive on all four indicators (daily and weekly MACD, 10 day and 50 day exponential moving averages). This week ONE stock (2%) is positive on all four indicators. A statistically insignificant change.
In the last three weeks, the number of stocks negative on all four indicators has been: 26 (52%), 17 (34%), 13 (26%). Again, there appears to be a positive trend change for the index in this group. (Down is good.) This week, the following stocks were negative on all four indicators:
The striking feature of this group is the dominance of the property trusts (five out of 13) and the presence of the biggest miners and energy stocks (BHP, Rio, WPL). The last three saw good movements in the last couple of days, but not enough to reverse out of this group. Wesfarmers involvement in coal mining is probably the reason for its inclusion in this group. Conclusions
The XAO (All Ordinaries Index) has fallen below the March lows. But it is above the trend line from the January and March lows. This is the final “line in the sand”. A further break below this would take the index into very dangerous territory with the prospect of a “crash”.
There are some faint glimmers of hope in the indicators that we are on the verge of a retracement upwards. But, at this stage, that is all they are. In the last few weeks, the predictive power of these indicators has been weak.
Next week will be critical.
The market by most guides is very oversold – in some cases at historically low levels. Such conditions often result in sharp upward reversals.
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