•The top order in the S&P Sectors was dominated by Defensives. The usual risk indicator (SmallOrd/50Leaders) was defensive with 50 Leaders positive, and Small Ordinaries negative.. Materials were once again the worst performing Sector. How long can this rally last without a stronger performance by Materials? Probably as long as the Financials continue up strongly. Well, they got the shakes this week.
MAJOR WORLD MARKETS INDICES ONE-WEEK PERFORMANCE
•This week, four of six major indices were positive, with Australia muddling along.
•China continued its relative underperformance this week, while the Nikkei continues its incredible upward movement under the influence of the strong stimulus package implemented by the Abe Government. China’s performance provides some explanation for the poor performance of our Materials sector, so dependent on the Chinese market. The Abe stimulus in Japan is affecting many of the world’s stock markets. It’s adding to the positive flow of money coming from stimulus in the U.S. and Europe. Meanwhile, China appears to be pulling in the reigns on monetary policy.
•Results for the six indices are: 1.Nikkei – Japan: +2.26% 2.DJ World: +0.84% 3.E100 – Europe: +0.71% 4.SP500: +0.61% 5.XJO: -0.06% 6.China 88: -2.8%
AUSTRALIAN MARKET: MONTHLY CHART – XJO
•The chart is currently at 5120.2. The chart has broken above resistance, now support.
•Comparing the size of this rally to previous recent rallies (last 10 years), this one is still a babe. The 2003-2007 bull market had three phases (or rallies). Each of those was larger in extent than the current rally lasting from June, 2012. This is even smaller than the bull rally out of the GFC Low.
•The chart pattern was a right angled triangle. The measured move for such a pattern, if it completes, is around the 2007 high. In round figures 6900.
•This now appears to be a cyclical bull market – we can expect the 2007 highs to be challenged. Next resistance level is 5950. Support at 4981. That’s not far away.
•Stochastic, RSI and CCI are overbought. They can remain so for months.
AUSTRALIAN MARKET: WEEKLY CHART – XJO
•The XJO was down marginally this week (-0.06%). •This is a Heiken-Ashi chart which more or less smooths out minor ups and downs complicating interpretation of Candlestick charts. The chart shows an unrelenting bull rally since mid-November, 2012. The lower tail on this week’s candle hints at a weakening trend – but still nothing to cause concern.
•RSI.9 is at 86.7. That’s extremely overbought. Readings above 80 occurred frequently in the 2003/2007 bull market. So we shouldn’t presume that such a high reading is likely to produce a correction. In a bear market, such a presumption would be reasonable. In a bull market, it’s an indication of strength. •Stochastic and CCI are both overbought, but can remain so for weeks. MACD Histogram has fallen below zero . That’s a possible early warning sign of a pull-back. Warning signs are just that, warning signs to watch – not a requirement to act.
•Currently, the uptrend is intact.
AUSTRALIAN MARKET: DAILY CHART – XJO
•The XJO finished at 5120.2. First level of horizontal support is is around 4980, then 4570 (round numbers).
•Indicators: 1.MACD Histogram. Below zero. Negative. 2.MACD. Below zero. Negative. (Sell rallies.) 3.RSI.9 is at 57.2. Positive. 4.Stochastic. 55.9. Below signal line. Negative. 5.CCI.14: +17.4. Weak but still above zero. 6.ADX: 31.5. Below 40. Weakening trend.
•The strong up trend from mid-November has flattened out but still trending upwards. •MACD below zero suggests short term traders will sell rallies. •ADX has fallen from above 60 to well below 40. This suggests the next move will be down. •We had three consecutive down days this week for the first time since early January. Volume increased on each of those days. This index is now in danger of topping out. Another couple of distribution days like we saw this week in the coming week, and the trend will be in serious doubt. Of course, that’s speculation at this stage. Let’s see what next week brings.
•Friday’s action looked like mania gripping the market with the XJO up 1.7%. No really good reason for it except the Madness of Crowds (Charles Mackay, 1841.)
AUSTRALIAN MARKET: DAILY CHART – XJO – Volatility
•This chart shows the daily XJO Index in the top pane. The lower pane is the Average True Range. ATR is a measure of volatility in an index or stock. (This is quite different from the VIX which is based on options activity.) • ATR is calculated as follows: “The average over the last X days of the true range, which is the largest of the following: (1) today’s high minus today’s low; (2) today’s high minus yesterday’s close; or (3) today’s low minus yesterday’s close.”
•The time period used in the ATR in this chart is 14 days. •It’s generally accepted in the market that up trends and sideways trends tend to have low volatility, while down trends have high volatility. We can see how this held true in the corrections in mid-2012 and Oct/Nov 2012. As the market fell heavily, the Average True Range increased significantly. As the market trended steadily higher from June to October, Average True Range fell steadily. That’s the way trends normally work. High ATR values invariably mark market bottoms. •Now we have an anomaly – ATR is spiking sharply while the XJO continues to trend higher. Volume has also increased sharply, peaking on Friday when volume relative to the 20-Day Average was one of the highest since the market top in 2007 – even higher than the relative volume figures recorded in the 2008 bear market. •The above chart is a Heiken-Ashi chart which smooths out day-to-day variations. I haven’t shown a regular Candlestick chart. Looking at such a chart we’d see that in the past 17 days there have been five days (nearly one in three) where the day to day % change was 1.3% or greater. Friday was +1.75%. 21 February was -2.33%. From the beginning of this rally on 19 November, 2012 to 20 February, 2013, the XJO experienced no swings of that magnitude. The biggest daily change was on 2 January +1.23% – that was post Fiscal Cliff euphoria.
•It may be an anomaly – but on occasional rare instances, markets do top out on high volume and high volatility. It is seen more often in Forex operations than stocks.
•The Australian market is behaving in a most peculiar manner.
SECTOR STRENGTH – MEDIUM TERM
•This is an attempt to give a longer term view of inter-sector performance than the Weekly Performance Chart at the beginning of the Report. •The tabular presentation provides both quantitative performance on trend strength/weakness by using the RSI.9 figures and a qualitative assessment of trend strength/weakness. The qualitative assessment in the column marked “Trend” is derived by looking at Heiken-Ashi weekly charts. •RSI.9 rarely rises above 80 in normal markets. Above 90 is very rare, although one wouldn’t think so looking at this list, with three sectors above 90. That’s an indication of just how strong a trend we are currently in. Above 70 is actually extreme – and, in normal markets, would suggest a reversal is not far off. That hasn’t been the case in this bull rally. RSI.9 between 50-70 shows a strong trend if the indicator is rising. 40-50 and falling is negative. Between 30-40 in normal markets, traders can expect a reversal to the upside. Below 30 is rarely seen.
•At this stage, only one Sector is in a clear bear trend – Materials (XMJ). Telecoms are looking weak, but weekly RSI still hasn’t fallen below 50, so this might be one of those itty-bitty pull-backs the Telecoms regularly have. Industrials (XNJ) may be on the verge of a trend reversal. Six sectors are in Rising Strongly trends.
Only when we see a break in Financials will this market be in serious difficulties.
•None of this, by itself, provides triggers, but suggests times when to be cautious, in the market, or out of the market.
•Next I’ll have a look a three charts (not in order): Financials, the biggest sector in the market and Rising Strongly; Materials, the second biggest sector in the market and Falling Strongly; and Small Ordinaries, a measure of breadth.
AUSTRALIAN MARKET: SECTOR PERFORMANCE – XSO Weekly
•It’s a market maxim that Small Ordinaries outperforms in bull markets. The Small Ordinaries is a barometer of the health of the market. Rarely can a bull market continue without strength in the secondary market. Small Ordinaries have been underperforming the XJO for the past year. After such a lengthy time, one begins to question the wisdom of market aphorisms. A market can, however, continue upwards without solid breadth for a long time, but, eventually it will crumble. •The ADX is below 20, suggesting, at best, a weak trend.
•This week I’ve shown a Heiken-Ashi chart of the XSO weekly instead of the usual candle-stick chart. They are similar in appearance but the H-A is, more or less, a smoothed version of a Candle-stick chart. As such, it is easier to see trends, and trend changes. Trend changes are often heralded by a wide-range spinning top. It’s not a very reliable signal – but a warning. It needs to get a following bearish candle, a dark body with a lower tail, to confirm. Four weeks ago, we got a big spinning top. The past three weeks are weak, but not especially bearish.
•For the Small Ords to enter a bear trend, the wide range spinning top of four weeks ago needs to be broken to the downside.
AUSTRALIAN MARKET: SECTOR PERFORMANCE – XFJ Weekly
•The Australian market in recent months have been led upwards by yield stocks and defensives. (Odd behaviour for a bull market.) The back-bone of this has been XFJ – Financials. Currently, its daily RSI.9 is in the “very rare” category above 90. •The XFJ has regularly outperformed the ASX200 since July, 2011. •This market will end when the leader falters. There’s no sign of that so far in the Heiken-Ashi chart which continues to show bullish candles for the fifteenth week in a row. (Bullish candles have light bodies with a long upper wick and no lower wick.)
•At this stage, the market leader is still strong.
AUSTRALIAN MARKET: SECTOR PERFORMANCE – XMJ Weekly
•Uptrend channel from September, 2012 has broken to the downside. •Last three candles on chart are long dark bodies with lower candles – indicating a strong down trend. •ADX has turned down indicating a change in trend. •RSI.9 below its mid-line – bearish. •A comparison of the Materials with the ASX200 shows that the Materials have been underperforming since the high in April, 2011. •All indicators have turned down, but not yet oversold, suggesting more downside is possible. •This chart is looking seriously bearish. It shows a major long-term head/n/shoulders pattern with a recent test of the neckline. That appears to have failed.
•The only saving grace at this stage is the marginal break of the 30-Week TMA and the support line of the uptrend channel. Another week of downward movement would make this a definitive break. At this stage Materials looks likely to head back to the GFC low. That will put serious downward pressure on our broad market.
INTERNATIONAL MARKETS: SP500 - WEEKLY
•The SP500 finished at 1560.7. Up on the week, +1.48%. After two weeks of consolidation, the index resumed its bullish profile.
•Indicators: MACD Histogram. Marginally below zero. Neutral. MACD. Above zero. Positive. (Buy dips.) RSI.9 is at 80.2. Overbought. Highest since Feb., 2011. Might need to show a negative divergence before the market will reverse. Stochastic. 96.2. Overbought. Above its signal line. CCI.14: +130. Overbought. Negative divergence. CMF. The indicator grew an extra leg this week. This market is strong.
•The chart is once again back to the top of the uptrend channel. A break above that would be very bullishThe up trend remains intact. Let’s not pre-empt, we’ll wait for the trend to break. Bulls will have no concerns until the lower support line on the long term up trend channel is broken to the downside.
INTERNATIONAL MARKETS: EUROPEAN TOP 100 - WEEKLY
•The E100 finished at 2456.83, up +0.71% for the week . Support/Resistance: 2299.7/2470.6. •Indicators: MACD Histogram. Marginally above zero. Neutral. MACD. Above zero. Big negative divergence. RSI.9 is at 73.6. Overbought. Stochastic. 89.2. Overbought. CCI.14: +142.2. Overbought.
•The chart is showing a bearish rising wedge. If this does break to the down side, it may take a couple of weeks of negative action before doing so.
•The medium term up trend remains intact.
INTERNATIONAL MARKETS: NIKKEI 225 - WEEKLY
•Nikkei 225 is the broad market benchmark for the Japanese stock market.
•The Index finished at 12561. Up +2.26% for the week. That’s eighteen weeks in a row the N225 has been up. The Random Walk theory suggests that the stock market is similar to a casino. I’ve seen nineteen reds in a row at the casino. I’m just wondering … one more week? •So far this chart shows no sign of reversing. It’s getting close to the length of the bull rally in 2009. That might do it. •RSI is now at 93.6. That’s the highest reading since the GFC low in March 2009. I guess it can go higher – but it can’t go above 100. :)
•All we can do is look on in wonderment.
INTERNATIONAL MARKETS: CHINA88 - WEEKLY
•This week the China88 index was down -2.8%. •The trend is down with four bearish Heiken-Ashi candles in a row. •Indices have all flashed “sell” signals. •China is the one bleak picture in a bullish landscape. The current move could be a respite move after the strong move up from Dec. 2012, in which case, we can expect consolidation at the next support level and then a rebound. The large bullish falling wedge suggests that there’s more room on the upside. •On the other hand, China could be the early warning signal. Let’s see what happens at support.
SUMMARY & CONCLUSION
First of all, a run down of the major world indices that I watch. Four out of six indices were up. The figures: XJO, -0.06%; SP500, +0.61%; Europe Top 100, +0.71%; China,-2.8%; Nikkei, +2.26%, Global Dow, +0.84%. China was bleak, Australia was flat, other indices performed well. Europe is in a bearish rising wedge and at resistance. America (SP500) is also in a bearish rising wedge. The next move for them is likely to be down. The Nikkei appears unstoppable – like a runaway train – but runaway trains usually end in train wrecks. Of course, a Super-Hero called ABE could intervene to prevent that.
Europe, America and Japan have all embarked on major stimulus programmes. China is pulling on the reins. This can go either way. Whichever way the major markets turn, Australia will go that way too. The questions now are: Will the Chinese downturn infect other markets? Or, will their stimulus programs continue to push the bull higher? Or, is the Chinese market just taking the pause that refreshes?
The Australian market is beginning to behave in a most peculiar manner – with volatility and volume both rising. That’s characteristic of market bottoms not tops. Day to day movements are occurring with larger and larger swings, with bigger and bigger volumes. This uncharacteristic behaviour at the top of a bull rally doesn’t bode well.
Last week I introduced a new feature – the Sector Trend Strength Table, which I simplified this week. Many sectors are showing strength rarely seen. Mean reversion theory suggests that a correction is due. Materials, one of the most important sectors in the market, is already in a down trend. It may have completed a huge Head/n/Shoulders top. If that’s the case, we can expect a lot more downside. Telecoms, which was one of the best performing sectors with investors chasing yield, is acting bearishly. But it might just be another itty-bitty pullback like it had previously in this bull rally from mid-2011. Industrials are also showing possible weakness. But, I can’t see a correction developing until Financials turn down. That hasn’t happened yet.
Market Structure is poor. It’s rare that a market can continue a bull rally without strength in the secondaries. They usually lead. The XSO (Small Ordinaries) has underperformed the XJO for about a year. Such anomalies can persist for a long time, but eventually, without a solid base in the secondaries, the structure tumbles like an inverted pyramid in a strong wind. We just haven’t had the strong wind … yet.
While the trend is up, you have to stay with it, no matter how ludicrous it feels.
Remember: do your own research. Make your own decisions. I hope that the information I show might help you just a little.
ETF: SLF - WEEKLY
•This week I’ve continued to show the chart for XPJ – the Property Sector. I’ve mentioned before that SLF (the tracking stock for XPJ) has low liquidity which means that prices on offer are often those offered by the market maker. They offer prices with a very wide spread. If you put in an “at market” order you’ll often end up with a price which is out of kilter with the underlying instrument. This also results in distortions in the tracking stock, SLF. •This has been an extraordinary bull market in Property. Since December, 2011, both the CCI and RSI have remained above their mid-lines. Any dip has been bought. It didn’t even really blink in the May, 2012 general market correction. It dipped for a couple of weeks, but never looked in danger of a trend break. •Nor has it ever looked likely to go exponentially up. The trend has been just steadily up. An exponential move could bring the sector down. That would be seen with a sharp move by the chart above the Standard Error Channel. •Trend strength as measured by the ADX is now at its highest level in this bull run, +53.1, with no sign of weakening. •Until the Index chart decisively breaks to the down side, property investors are laughing. •The Property Sector is an interest rate sensitive sector. It’s borrowing costs go down and investors seeking income will switch out of other instruments (e.g., bonds and bank accounts) and into Property Trusts seeking higher dividends. While the RBA is in rate cut mode, it’s difficult to see how the Property Sector can suffer significant falls.
•According to Comsec, SLF Dividend Yield is 5%. That remains good value. Dividends are paid quarterly. Next dividend date is the end of March, 2013.
•(SLF is the Exchange Traded Fund which tracks the performance of the Property Sector on the Australian stock market.)
ETF: WEEKLY STW
•STW is the tracking stock for the ASX200. •This week the ETF rose +0.96%. The up trend is very strong and showing no sign of weakening.
•This chart shows an almost perfect example of a break above resistance and then a pull-back to test that level as support (Oct/Nov 2012), before resuming its up trend.
•Take signals from the XJO chart. •Dividend Yield: 3.5%. Dividends are paid half-yearly. Next ex-dividend date will be at the end of June.
•(STW is the Exchange Traded Fund which tracks the performance of the ASX200.)
OZ GOLD WEEKLY
•In the wider scheme of things Oz Gold (Gold priced in Australian dollars) has a long term upward bias and tends to trend inversely to the broad Australian market (XJO). This is particularly evident in times of extreme stock market stress.
•The chart has been in a long term sideways trading range after a sharp rise counter trend to the big fall in the Australian stock market in mid-2011.
•The chart is now at the bottom of the range. Around 1520 is an exceptionally important support level. It has provided support since mid-2011. Before that the level provided resistance to the huge rise in 2008 into early 2009 and then later in mid-2011. If this breaks to the down side, it will give a major technical sell signal. Which would be bullish for the Australian stock market. •The past three weeks have been narrow range weeks with Gold unable to break support. This suggests the next move is likely to be up. But we have to wait and see. •RSI is at 32 – that’s low and could spark a counter trend move. In the past four years, whenever the RSI gets down near 30, the chart bounces to the upside. The odds favour a move up from here for Gold and down for Australian stocks. •While the Australian market continues its bull run, we can’t expect a bullish profile in Oz Gold. If the Australian stock market does fall, then we can expect a bounce in the Oz Gold price. It could be sudden and sharp – difficult to catch. •For a pure buy’n’hold investor, some exposure to OzGold has much to commend it, particularly as a hedge against falls in the general market. Plus, the long term performance has been positive. (Usual caveat - past performance is no guarantee of future performance.
•(Note. Although under “normal” circumstances, Oz Gold and $US Gold are relatively well correlated, this is not always the case. During the GFC - POG in US $ fell sharply along with other asset classes while the POG in AUD rose sharply due to a rapid fall in the Ozzie Dollar. For Australians Oz Gold proved to be a safe haven while almost all other asset classes fell.)
(20min delay)