The general market (XAO) was stronger this weak, +2.94% (versus -1.18% the previous week). The XAO remains above a rising 13-Day Exponential Moving Average.
All ten SP Industry Sectors were UP. Although up, the four defensive sectors (Consumer Staples, Telecommunications, Utilities and Health) were the weakest sectors. The strongest sectors were: Materials (+4.75%) and Financials (4.26%). It’s unusual to see both these sectors showing relative strength at the same time.
The sub-sectors I follow were all up strongly: Property Trusts (5.36%), Metals and Mining (5.23%) and Gold (4.69%).
In one of the conundrums of the stock market, both the Small Ordinaries (+4.42%) and the 50 Leaders (+3.55%) did better than the XAO. I’m not sure what to make of this. Usually, one or other of the 50 Leaders (Risk Avoidance) or Small Ordinaries (Risk) shows strength or weakness, but not both at the same time. It must have some significance, but, just what, escapes me. Perhaps the near future will reveal some answers.
Following are graphs for the three leading indices that I follow: Baltic Dry Index, Shanghai Stock Exchange Index, 10-Year Bond Yields (TNX – American Bonds). Each of these bottomed well before the Australian market and are now showing signs of topping. Each of them has continued to show weakness since topping in June/July.
Chart Two – Baltic Dry Index
The Baltic Dry has broken down below its150-Day SMA. The variation in this index has been unusually small for the past two weeks. I expressed some concern last week that the BDI could be reversing to the upside. Although this week was a little stronger, the move up was weak and showing no indication of a trend change.
The American Ten Year Bond Yield chart has been showing weakness for some weeks. This week it showed strength early in the week, but on Wednesday and Thursday exhibited a classic reversal pattern.
Chart Three – TNX
The Shanghai SSE has a marked double top and broken below the 65-Day SMA. The recent rise appears to be weakening and is likely to break to the downside.
Chart Four – SSE
GENERAL OBSERVATIONS
Markets this week continued to confound many experts depending on the September Effect to send this market into reverse. Some of the last remaining bears, badly mauled by this Bull Rally, are now throwing in the towel. That must be a sign we are close to a top. And there are some signs that at least a short term retracement might occur soon. Once again, the pluses and the minuses for this market are beginning to add up. Two important indicators are still showing no signs of capitulation: the Advance/Decline Line and the AUD/US$ exchange rate.
Chart Five – A/D Line
The A/D Line represents strength in the broad market. A fall in the market is usually preceded by a loss in breadth which means that the market is being carried upwards by fewer and fewer stocks. Eventually the last strong stocks weaken and the market falls. This is not happening at the moment.
This week the AUD/US$ showed upside strength. There is a strong correlation between strength in the local currency and the local stock market Hawkish noises by the Phantom of the RBA (Glen Stevens) is giving the currency extra shove to the upside. The chart of the AUD/USD is developing a (bearish) rising wedge formation – but it still seems to have plenty of room for upside movement before a down move occurs. And then there are no guarantees that a down move will occur – just a higher probability. In the meantime, the currency looks headed for the 0.90/0.92 cent area, which is some distance off.
Chart Six – AUD/US$
Two weeks ago, for the first time, I presented a ratings system for the Industry sectors so that a clearer picture of relative strengths and weaknesses could be obtained, while helping to image the over-all market. The ratings range from -100 to +100. I can now present that data in graphic format. (These ratings put most emphasis on major trends and less emphasis on recent market moves.) The following graph shows the position for the past two weeks (blue bars for this week, red for the previous week):
Chart Seven – Sector Ratio Rankings
This is a picture of a “mature” market with relative strength in the local economy (Information Technology, Industrials, Financials, Consumer Discretionary and Property), relative weakness in the export oriented cyclicals (Materials, Energy) and the Defensives.
Here’s how the 10 S&P Industry Sectors fared, ranked from top to bottom for the past week. The ratings are in order of magnitude:
Some anomalies occur in these ratings which an examination of specific charts can make understandable. Materials dropped in the ratings this week, but actually showed some strength. This was largely an artefact of the 65-Day SMA dropping below the 170-Day SMA. This represents the long-term trend, while the short-term trend turned up. These ratings emphasise the long-term trend over the short-term trend
Here’s the chart of the XMJ/XAO:
The XMJ was strong early in the bull rally, but its relative strength peaked in June with a small double top. It has been in a medium-term downtrend since then and broke below important support in August.
Last week I said: "Also notable are the ratings of the Small Ordinaries (+100) and the 50 Leaders (-100). A weakening in the Small Ordinaries and a strengthening in the Fifty Leaders would also be necessary for a reversion to a bear market profile. Relative strength and weakness in these indices is a measure of risk aversion. The market will continue to go up so long as investors are willing to take on risk – which means investing strongly in the more speculative end of the market."
This week, the Small Ordinaries has remained strong with a rating of 100, while the 50 Leaders showed a rise from -100 to -70. Risk aversion may be coming back into this market. If it is, then we are on the cusp of a trend reversal – but it still has to be proven. The Bull Rally in the general market was confirmed when the 13DSMA crossed below the 65DSMA on this ratio chart. Now, for the first time since then, the XFL/XAO Ratio is back above both of the 13 & 65 DSMAs. A bear cross (13DSMA above 65DMS) still has to occur for a call of a “bear market” can be made. Other confirming signs would also have to occur. But this is a concrete sign that a reversal may be at hand. Here’s the Relative Strength Chart for the 50 Leaders/XAO
Chart Nine – XFL/XAO
(This could be the most important chart I post for many weeks.)
To Summarise: The strong bull rally continued this week. Leading Indicators are still exhibiting weakness. The currency is continuing to show strength. That’s the way it has been for weeks. Industry Sector Analysis and the A/D Line provide no clear suggestion of a reversal. The current strength in the 50 Leaders might be a sign that risk aversion is entering this market. That may be an anomaly, or perhaps the first sign of weakening in this market. But it may be many days or weeks before a significant correction begins.
INDICATORS
The All Ordinaries Index (XAO):
Short Term (Daily): MACD: Positive – new buy signal. Histogram shows a negative divergence to price. RSI: 71.11. Overbought. Slow Stochastic: 89.52. Overbought.
Medium Term (Weekly): MACD: Positive. Histogram shows a negative divergence from price. RSI: 66.8. Positive. In a strong uptrend since November 08. Slow Stochastic: 86.89. Overbought. New buy signal: +ve cross above signal line.
To summarise: The market appears overbought – but new buy signals on the Daily MACD and the Weekly Slow Stochastic confuse the picture. More upside strength may be possible before at least a short-term correction occurs.
50 LEADERS
No. Of Stocks above 50-Day SMA: 47 (94%). No. Of Stocks above 150-Day SMA: 47 (94%).
These readings are raging bull market figures. They suggest we may see a “blow-off” top.
No. of Stocks above 10-Day SMA: 41 (82%)
These short-term readings are in the overbought zone – but still could have room to move higher up into the 90% Zone.
I’ve also done some additional figuring with the DMI and ADX. It is usually presumed that a stock is not trending if the ADX is below both the DMI+ and the DMI-. This week 34 stocks (68%) are trending positively. This compares to 30 stocks (60%) the previous week. The number of non-trending stocks has fall to twelve (24 per cent), the two down on last week. The number trending negatively has dropped from six to four (8%). The trending stocks figure is close to an extreme overbought reading of 70%. The next week or two will be very interesting.
CONCLUSIONS
This week the market strengthened once again, blowing away most of the few bears left standing.
Meanwhile, Norm and Norma are buying like there’s no tomorrow.
This market looks like it is headed for a “blow-off” top. Although extreme overbought readings prevail, it continues to surge higher, giving some new buy signals.
The only signs of negativity lie in the Leading Indicators and a little relative strengthening in the 50 Leaders. I’m leaning more and more to a “blow-off” top scenario. Then the market will surely revert to the downside. Of course, all that could change in the blink of an eye – watch the Indicators and the Trend Lines for clear reversals. Keep an eye on the Small Ordinaries and the A/D Line for some weakening, and the 50 Leaders for some relative strengthening. Changes in those three Charts will probably precede a fall in the market.
Finally, here's the tracking stock for the XJO. The rising wedge is ominous.
(20min delay)