Weekly wrap. Week ended 21/6/2024This is a long post. Skip to...

Weekly wrap. Week ended 21/6/2024

This is a long post. Skip to the end if you just want the "guts" of what I have to say.

ASX was stronger this week with the XJO up +0.93%.

Below is a chart for IOZ, a tracking ETF for XJO:

IOZ was up this week which took it to the top edge of the Value Zone. The Value Zone is the area where 70% of volume has been traded in the past 50 days. The top of the Value Zone often acts as a resistance level.

The Triple Super-trend Lines indicate that IOZ is trending sideways in the medium term - two blue lines and one yellow line indicates no trend, or neutral.

MACD has flattened out - another indication of a neutral trend.

This could go either way, but the fact that the chart is up against the top edge of the Value Zone suggests that the next move will be to the downside.

Sector Performance

Eight Sectors were up this week and three sectors were down.

The three negative sectors were Materials -1.8%, Info Tech -0.52% and Industrials -0.24%.

Best performing sectors were Utilities +4.21%, Financials +2.08% and Health +1.92%. Gold Miners (XGD) was up +3.97% but it is a sub-group within Materials and not a sector in itself. I'd note that Gold in America on Friday night suffered a big drop -1.59% which will feed into a big drop on the Gold Miners Index in Australia. Not much point in chasing the XGD just now.

The interesting part in this column graph is the group around the middle of the chart. Health, Staples, Utilities are all defensive sectors. Telecommunications +1.86% has some defensive quality to it but is usually included in the "Sensitive" group of sectors.

Depending on a positive business cyclical and sensitive sectors will usually outperform the defensive sectors. That's not the case now - that's a warning signal that all is not well with the stock market or the broad economy.

Below I've split the sectors plus composite bonds into performance according to the three groups of sectors.

Cyclical +0.74% average and Sensitive +0.44% average both performed positively this week which could be expected during a positive week for the ASX.

But the Defensive group far out-paced the other two groups. Defensive up an average of +1.93%. Something is not quite right in the Ozzie market when
Defensive is the strongest group in a positive week.

Breadth in the Australian market -MVW equal weight ETF.

People are well acquainted with the major Australian indices such as the XJO (ASX200), XAO (ASX500) and XTL (ASX 20 Leaders). These are all cap-weighted indices, i.e., the largest stocks have more effect on the indices than smaller stocks. People are less acquainted with an equal weight index. An equal weight index, as the name suggests, gives equal weight in the index to all stocks - big or little. An equal weight index is a good way to understand breadth. If, for example, an equal weight index for the Australian market is performing better than the XJO, then breadth is good - and the market is healthy.

If, however, an equal weight index is underperforming the XJO, then breadth is poor, the market is not so healthy, and is prone of shocks to the large cap stocks. An ETF which tracks the Ozzie equal weight index is MVW.

If you compare MVW to IOZ (above) you can see that MVW is under-performing IOZ. For example, MVW chart shows three blue Super-trend Lines - that's bearish. The chart is at the lower end of the Value Zone, whereas IOZ is at the top end of the value zone.

So we can conclude that breadth is poor and a shock to some of the larger cap stocks could send the ASX south.

American Market.

A profound change came over the American market this week. Dow Jones has been lagging well behind the Nasdaq where the big tech stocks live. That lagging relation took a positive turn for the Dow Jones this week. Below is a chart for the Dow Jones Industrial Average. The bottom panel shows the relationship between DJ and the Nasdaq. This is the Mansfield Relative Strength Index, which shows that DJ is now outperforming the Nasdaq. That might be positive for DJ but tech stocks have been the strength in the American market. If they are not leading, does that mean the end of the bull market for the America? Probably.

NVIDIA

Nvidia is a tech stock on the lips of people for the past two months. It has been carried up by a boom in Articifical Intelligence (AI) where Nvidia is a leader in AI computer chips. As a result of that boom it has become the largest stock in the American market, out-doing Microsoft and Apple.

Nvidia came to a shuddering stop on Thursday when a big bearish engulfing candle on heavy volume appeared on the chart. On Friday (Options Expiry Day) Nvidia saw its first blue Super-trend Line since early May. From early May, Nvidia was up nearly +80% - that's a boom. And it carried a lot of other AI stocks higher along with its upside trajectory.

Negative divergences on the Force Index and CCI both indicated the possibility of a pull-back. Force Index, which combines price action with volume, is now below its zero line - that's a bearish signal. CCI has also fallen below zero. Both those indicators use quite different inputs to create their direction, so agreement between the two makes for a powerful signal.

Back to the Australian market and a look at some internals.

Long Term Investor Index for the ASX.

My long term Investor Index is based on New Highs minus New Lows cumulative. This is something for long-term investors. While NH-NL Cumulative remains above its 10-day MA, that's a message for the long-term investor to hold.

NH-NL Cum remains above its 10-Day MA - that's a positive for the long-term investor with a broadly based portfolio.

Conclusion.

1. XJO is in a neutral, sideways trend held within a wide trading range. Long-Term Investor Index remains bullish.
2. Dow Jones is also in a sideways trend, but the leader of the American market, tech stocks, may be in the start of a pull-back.
3. Defensive group of sectors in the ASX have out-performed the Cyclical and Sensitive groups this week. This not the expected performance in a strong economy.
4. Breadth as measured by the Equal Weight ETF MVW is weak. That's a warning sign for the market.

To summarise: the Australian market is doing OK, but weakness in breadth and comparative strength of Defensive Sectors indicate that Australia could easily face a fall back in the market.

The American leading Index, the Nasdaq, is set up for a pull-back.

Caution. Be aware of signs of a pull-back.