The market is now in the middle of January, the Doldrums. After the Santa Rally, the market took a break this week. Nothing too dramatic, the XAO was down -0.26%.
Only three S&P Industry Sectors were up this week. Only one sector showed significant movement Energy which was down -3.6%. This negative movement in Energy has stalled what looked like a promising rally. But maybe it is just having a break before more upward movement.
Friday saw some dramatic action at the end of trading. CBA announced upgraded guidance on their profit outlook with less than two minutes of retail trading left which finishes at 4.00 p.m.. Not enough time for retail traders to assess the announcement and place an order. Big trading firms were then able to place buy orders in the after-market auction and all the big four banks shot up considerably. CBA went from 56.39 to close at 58.10, a rise of over 3%. The banks seem certain to see further upward movement on Monday when retail investors who were short scramble to cover their positions. Does something seem a little unfair about such action by CBA? This is not a level playing field with the big trading firms having an advantage over smaller retail traders. Practices such as this should be stopped. (And, no, I wasnt short CBA, or long. I currently have no financial interest in the stock.)
Best Three Sectors:
Information Technology: +1.3% Financials: +0.8% Consumer Discretionary: +0.11%
Among the sub-sectors: Property Trusts were down, -1.58%; Metals and Mining were down -0.3%; and Small Ordinaries, -1.37%. The 50 Leaders was down at -0.08%. Risk Aversion/Risk Seeking was biased strongly to the Risk Aversion side. Gold Mining was down, -0.74%.
Internationally, Shanghai was up marginally on the week after being up strongly on Monday. It finished the week marginally above its 50-Day Moving Average but well above the 200-Day Moving Average. Hong Kong was well down on the week after a big gap down on Wednesday, below its 50-Day Moving Average and above the 200-Day Moving Average. Tokyo had another good week to register a new 15-month high continuing the run which began at the beginning of December. The Dow finished down marginally on the week after a big down turn on Friday its biggest one-day drop in four weeks. The S&P500 had a similar week to the Dow and both are now at important support levels. London hit a new 15-month high on Tuesday and then retreated sharply. It is still well above the 50-Day and 200-Day Moving Averages. Copper also succumbed to the bearish sentiment and retreated but is still well above 50-Day and 200-Day MAs. The Commodities Index also had a down week, down four out of the five days but coming off a 15-month high. So, apart from Tokyo, the international scene was bleak.
Chart One Weekly % Change Indices Week Ending 08/01/2010
Contrarian Investors believe that the vast majority of investors always get it wrong. Well that oversimplifies the situation, but you get the general idea. Contrarians look at Sentiment Indicators and when these are at extreme levels, it might be best to begin taking an opposing view of the market. Extreme optimism about the market would suggest that a retracement or correction is in the offing. The following are some of the sentiment indicators in the American market followed closely by contrarians:
VIX Index: (Derived from Option data, the VIX or Fear Index reflects views on market volatility for the next 30 days. Low Vix = Complacency, High Vix = Fear). The VIX Index hit a new 26 Month Low on Monday, 11/1/2010. The Monday White Candle was completely outside the lower Bollinger Band and below the supporting down trend line of the converging wedge. This has not happened in the past six months. Since then the Vix candles have moved straight back within the wedge and above the supporting trend line. This is bullish for the Vix and a sell signal for the American market. A break above the upper constraining line of the wedge would confirm.
Chart Two VIX (Volatility Index American Market)
Advisory Service Sentiment: (A survey by Investors Intelligence of a broad range of stock market newsletters.) At 13/1/2010, there were 53.4% Bulls to 15.9% Bears a ratio of 3.36/1 Bulls/Bears. Thats the highest reading in six years.
CBOE Put/Call Ratio: 0.49. The range for the past six years is 0.35 to 1.35. This reading is not extreme but shows above normal optimism. Punters are buying about two call options for every one put option.
Contrarian signals do not necessarily provide timing cues (buy/sell signals). They are at best secondary indicators but they provide an important context for the making of investment decisions. The above signals are currently flashing amber.
LONG TERM TREND
The long-term trend is determined by the 13-Day SMA and the 150-Day SMA. It is currently positive
Chart Three XAO with 13/150-Day Moving Average Cross-overs.
The 13-Day Moving Average is above the 150-Day Moving Average, once again heading up and at a new bull rally high. The 150-Day Moving Average continues to move upwards. The market is in a long-term positive trend.
MEDIUM TERM INDICATORS
Chart Four Weekly XAO with Positive MACD.
The Williams %R (30) and the Aroon Oscillator are both reading overbought. The Slow Stochastic (5, 5) is above 90 (not shown on the chart). This is an extreme overbought reading.
The Index price is clearly at the lower end of an important resistance area (about 4900-5250) and at the 50% retracement level of the bear market. The MACD has just crossed above its signal line but showing a negative divergence from price. The combination of key resistance and overbought readings suggests at least further consolidation and possibly retracement in the near future. A break below the 4500 area would be bearish.
Chart Five Daily XAO with Positive MACD above Zero.
This week, the Daily MACD is above the Zero line and above its signal line but curling over. The MACD Histogram is falling (the market is losing momentum). The Aroon Oscillator and Williams %R (30) were both above their over-bought lines and have turned down. The short-term uptrend line from mid-December has broken to the downside.
Given the over-head resistance and over-bought momentum readings on both the Weekly and Daily Charts, consolidation or a short-term retracement is highly probable. A test of the early-December high at around 4800 seems likely.
THE OZZIE DOLLAR
The Ozzie Dollar has been in a strong short-term rally since mid-December and is consolidating along with the Australian stock market. It is currently consolidating below resistance and just below the bull rally high of 94.11 made in November. Momentum may be slowing, but a test of the November high is still on the cards. A fall would suggest a test of the mid-line of the Bollinger Bands (dotted line 20-Day Moving Average.)
Chart Six Australian Dollar
SECTOR ANALYSIS
Heres how the 10 S&P Industry Sectors fared, ranked from top to bottom for the past week. The ratings are in order of magnitude with the previous weeks ratings in brackets. Despite the minor fall in the market this week, four sectors are rating positively as against three positives the previous week. Two of these positive sectors are the two most important for the future of the market Financials and Materials, the two biggest sectors in the market.. All of the four defensive sectors deteriorated and are once again reading minus-100. Nothing in these figures suggests we are in a bear market, thus confirming the long-term trend chart (above).
Last week: No. of Stocks above 10-Day SMA: 36 (72%) No. Of Stocks above 50-Day SMA: 44 (88%). No. Of Stocks above 150-Day SMA: 46 (92%).
This week: No. of Stocks above 10-Day SMA: 20 (40%) No. Of Stocks above 50-Day SMA: 39 (78%). No. Of Stocks above 150-Day SMA: 44 (88%).
Chart Seven 50 Leaders: % above 10, 50, 150 SMAs
The short-term over-bought reading (Stocks above 10-Day MA) has dropped considerably this week, but could drop some more. Medium-term and long-term readings (stocks above 50-Day MA and 150-Day MA) are still elevated and suggest a retracement is probable.
ADVANCERS AND DECLINERS
The Advance/Decline Line has paused this week but is well above the October high giving a positive divergence from the XAO Chart.
Chart Eight Advance/Decline Line
Chart Nine: Net Advancers-Decliners 5-Day Average
The above chart shows a 5-Day Average (Blue Line) of the Net amount of Advancers minus Decliners. (The yellow line is an 8-Day Average of the Blue Line). Whenever the Blue Line reaches +300 and turns down, the XAO usually consolidates and then turns down over the next two weeks. The only time this did not happen was in late July when the market continued upwards and then consolidated within the two week period. However, this Indicator has become a reliable indicator of consolidation/retracement. The market usually doesnt turn up again until the Blue Line has dropped below the Zero Line and then turned up.
The Net Advances minus Decliners turned down at the beginning of this week and is still above the Zero line. This suggests that some further weakness in the market can be expected in the coming week.
CONCLUSIONS
The market is in a short term counter-trend movement. The long-term trend is still up.
Many Indicators are still reading overbought. On balance, the outlook favours some further pullback in the short-term. rather than further upside. The November high (around 4800) provides a likely target for any pullback. A successful test of that area should see further rises. A break below the 4500 area would be bearish. That leaves a lot of wiggle room if the market does decide to pull back for longer than a week to ten days.
Long-term, the trend is still up. The weight of evidence in the medium-to-long term is still with the bulls until proven otherwise.
The Decade Trend and the Presidential cycle (see previous reports) suggest a reversal to the downside sometime in the first quarter of 2010. Well continue to monitor that scenario closely. Remember that is just a scenario not a prediction. And watch for Black Swans they can appear at any time.
Keep watching the blog for daily updates (Monday to Thursday). http://redbackmarketreport.blogspot.com/
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