Its about seven weeks since my last report. Ive been away in Turkey having a wonderful time a country I can highly recommend as a destination for an overseas sojourn.
This week's report is a little shorter than usual (blessedly?) as I am still struggling to update many weeks of lost data.
The past couple of weeks have seen world markets drop considerably. The news media is, of course, playing out its usual panic scenarios day by day. So, just how bad are things? And should we be panicking? Or is the time for panic over?
Forget the media. The best antidote to panic is to look at a comprehensive set of hard cold stats, assess their importance, and then make a plan of action.
First heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past 20 Days:
All ten S&P Industry Sectors were down. The general market represented by the XAO was down over nine per cent. The three best performers in the 10 Industry Sectors were: Telecommunications (-2.7%), Consumer Discretionary (-6%)and Utilities (-6.3%). The three worst performers were Materials (-13%), Energy (-10.7%) and Information Technology (-9.5%).
Most surprising is the relative out-performance of Consumer Discretionary. The Consumer Discretionary Sector is one sector which usually leads the market up and down. The media has given plenty of air-play to a slow-down in consumer spending as a result of interest rate hikes and the withdrawal of the Governments stimulus spending. Yet the Consumer Discretionary is showing relative strength (or perhaps, less relative weakness). That seems to be a conundrum. Given its relative strength, this may be grounds for thinking that the current pull-back is just that in an ongoing bull-market.
Among the sub-sectors: Property Trusts were down only, -0.7%; Metals and Mining were down a whopping -14.3%; and Small Ordinaries, -10%. The 50-Leaders was down at -9.7%. This is only marginally better than the Small Ordinaries. Risk Aversion/Risk Seeking was evenly balanced. Another surprise. Usually in severe pullbacks (such as this one) Risk Aversion (flight to quality) is to the forefront. This may be another pointer to recent action being a pull-back in an ongoing bull market.
The Gold Mining Sector was down, -6.2%.
LONG TERM TREND
Below is a long-term chart of the XAO. It continues in a long sideways consolidation. The 13-Day MA remains above the 150-Day MA, but it seems only a matter of days before that cross is made.
Critical support is shown by the red horizontal arrow. The market is right at this level now. Bulkowski uses a term cloud bank which probably best describes this current pattern. This pattern has currently taken nine months to develop. A break below the bottom of the cloudbank usually results in a rapid and large decline (average 56%). So a decisive break below 4500 would be very bearish.
Chart TWO Long Term Trend.
MEDIUM TERM INDICATORS
Chart Three Weekly XAO.
The Weekly RSI (2) is below 30 indicating a strong downtrend is in place. A rise back above 30 would warn of an impending trend change. The Slow Stochastic (5,5) is signalling oversold (below 20) but it is a long way below its signal line at 62.56. So the Index can remain overbought for some time before a cross-over of the signal line becomes imminent. The Weekly MACD Histogram is showing a positve divergence from price, but multiple divergences are often required before a trend change occurs. Until the indicators turn up significantly, we must presume the down trend remains in force.
SHORT TERM INDICATORS
On the daily chart (see below), the fall in the XAO has been accelerating this week. The RSI.2 is below 30 indicating a strong short-term trend is in place and this is confirmed by the StochRSI.30 which is below 0.2. No divergence exists on the MACD Histogram (12,26,9). The Index is below the 30-Day Moving Average. The fall in the XAO has been dramatic. The long tail on the Friday candle suggests a short-term bounce may occur next week.
Chart Four DAILY XAO.
The RSI on the Daily XAO is reading at 19.31. We have to go back to January 08 to find a worse reading. That resulted in a sharp short-term rise in the Index. A similar reading occurred in July 08, but the market continued to fall after that reading and then went into a sideways consolidation before commencing the disastrous fall into November 08. So an extreme oversold reading on the RSI is no guarantee of the market rebounding into a strong uptrend.
Chart Five DAILY XAO with RSI
THE OZZIE DOLLAR
This week Im presenting a weekly chart of the Ozzie Dollar. It shows a sideways consolidation since September 09, similar in time to the consolidation on the XAO. The RSI.2 is below 30 indicating a strong short-term downtrend. The StochRSI.30 has broken below the 0.2 level confirming the downtrend.
The importance of the 85c. support level is clear. A break of that level would be bearish for the AUD and the XAO.
Chart Six Australian Dollar Weekly
SECTOR ANALYSIS
The following rankings show percentage changes in the Relative Strength Charts of the respective Indices compared to 50 Days ago. This puts changes in each ratio chart on a comparable basis. It also provides a medium term view of changes in the sectors. Rankings for this week are:
All sectors are negative. To put this into perspective, in my last report (about seven weeks ago), six sectors were positive and the week before, eight sectors were positive.
The bottom of the league table is dominated by two of the main drivers of the Australian economy, Financials and Materials which together make up over 60% of the ASX300. The top two sectors are both defensive sectors. In a full-blown bear market, Id expect Health and Consumer Staples to join the other two defensive sectors at the top of the table. So, this gives just a little hope to the bulls, but not much. Note: the perennial flea-bag, Telecommunications, is at the top of the table despite the constant bagging by the government and the threat of exclusion from the NBN.
50 LEADERS I began keeping records for the 50 Leaders on 25/9/09. While on holidays in Turkey, I have been unable to maintain this record keeping. So for comparison purposes, here are the lowest readings I have available on my records prior to going on holidays.
Lowest previous readings from late September 09 to late March 2010. 2/11/09 No. Stocks above 10-Day SMA: 1 (2%) 5/11/09 No. Stocks above 50-Day SMA: 8 (16%). 29/1/10 No. Stocks above 150-Day SMA: 21 (42%).
These are extreme low readings the market is oversold expect a bounce.
SUMMARY AND CONCLUSION
Trading/investing is never easy. Staying cool is never easy, unless youre a Clint Eastwood character.
To me next week looks like a lay-down "misere" this will bounce. Theres enough evidence that this is not a full bear market (yet) the Consumer Discretionary Sector, for one, is still too strong despite dire tales in the media.
Theres enough evidence that this market is grossly oversold. (See the % of stocks above the 50-Day Moving Average and the RSI.)
The market last week accelerated to the downside day after day. Then Friday was the biggest down move of all and finished with a long tail. Volume on that day was the highest since October 09 (and that includes Option Expiry days when volume tends to be very high.) Friday looks like capitulation day.
Were at a major support level.
Look for a bounce in the market.
What happens after that is still in the lap of the gods. Follow the indicators. A break below 4500 would be very bearish.
A break of the downtrend line with confirmation by strong up moves of the RSI (14) and the StochasticRSI (30) would signal this market as a strong buy.
Nothing is for certain in the stock market. Follow the indicators, and stay cool.
(20min delay)