Well, it’s no news that the market was down on Friday on jitters about Dubai. Those jitters were fomented by the usual panic headlines in the press. The market after a consolidation lasting over two weeks was ripe to be knocked down by some bad news, particularly from left field. Nevertheless, the market suffered some severe technical damage. More about that later in the report.
The XAO was down -2.33% on the week. Only One S&P Industry Sectors was up for the week – Telecommunications. Telstra is coming into its own as a defensive play. (Eat your heart out Future Fund.)
Among the sub-sectors: Property Trusts were down, -4.09%; Metals and Mining were down in line with Materials, +0.55%; and Small Ordinaries, -2.26%. The 50 Leaders performed in line with the XAO at -2.34% and performed marginally less well than the Small Ordinaries. Risk Aversion/Risk Inclination was weighted about even on those measures. Gold Mining was up at +1.41%.
For two weeks now the market seems to be sending a message that all is not quite right with our local economy (financials and industrials down, defensives up). The world scene also now seems to be changing for the worse. Shanghai has been weak this week, and Japan is in a primary down trend. American bond yields are weakening, but commodities are still reasonably strong. American market bell-wether, Goldman Sachs, is in a down trend. (An old saying is, where Goldman Sachs goes, there goes the American market.)
The long-term trend is determined by the 13-Day SMA and the 150-Day SMA. It is currently positive.
Chart Two – XAO with 13/150-Day Moving Average Cross-overs.
Conclusion: Long term Indicators are giving a hold message.
MEDIUM TERM INDICATORS
Chart Three – Weekly XAO with Negative MACD.
The Weekly MACD has crossed below its signal line. This is often a bearish sign.
Chart Four – Daily XAO with NEGATIVE MACD.
On the daily chart, two key uptrend lines have now been broken to the down side. The Daily MACD and the Weekly MACD are both now below their signal lines. This is a bearish confirmation of a down trend. The Daily MACD is within a smidgin of going below the Zero Line. A break by the MACD below Zero would be further confirmation.
A break by the chart line below 4515 would be a highly significant bearish signal.
Conclusion: The XAO is in a counter-trend downward movement. It is close to confirming a primary down trend.
LEADING INDICATORS
I show the following two charts on a regular basis. Both lead our market up earlier in the year and both topped out in June/July. Neither has been able to breach those tops since.
Chart Five – Ten Year Bonds - America
The 10-Year Bond Yield has been in a down sloping channel since June, setting up a negative divergence to both the American market and our market. The TNX bottomed earlier than the share markets and led them up until June. It now seems to be giving a clear message that the trend is down. A weakening of the bond yield is usually taken as a message that the economy is weak.
Chart Six – Shanghai
SECTOR ANALYSIS
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 with the previous week’s ratings in brackets. No sector scored +100. The “domestic” sectors (Consumer Discretionary, Industrials and Financials) weakened. Materials has continued to rise up the rankings and is now registering positively. Nothing in these figures suggests we are in a bear market (all defensive sectors are negative), thus confirming the long-term trend chart (above).
These Industry Ratings are beginning to show some disturbing trends. Only three Industry Sectors are showing up positively. None have been rated at +100. Materials have moved from the negative group into the positive group. Financials have flipped from the positive group into the negative group, counter balancing the move by Materials. None of the Defensive sectors (Consumer Staples, Utilities, Telecommunications and Health) are registering -100, which they were doing on a regular basis. The market is showing a distinct overall weakness while the Defensives are improving. This is a very negative development. Still early days. When the Defensives flip into the positive area we’ll know for sure that the market is again a bear market, but it looks like it is headed that way.
IT’S ALL ABOUT THE DOLLAR
The dogs have been barking it this week: The American Dollar is crashing. One commentator I noted even said that every currency, major and minor, was appreciating against the US$. Well he was wrong. While the American $ Index was falling, the Ozzie dollar was also falling against it. This is negative for our share market which has been sustained by a strong local currency. The chart line has now decisively broken below the supporting uptrend line of the rising wedge, and the 13-Day MA has also broken below the supporting uptrend line. To confirm a downtrend, it still needs to drop below the 89 cent area.
Chart Seven – AUD/US$
50 LEADERS
Last week: No. of Stocks above 10-Day SMA: 14 (28%) No. Of Stocks above 50-Day SMA: 20 (40%). No. Of Stocks above 150-Day SMA: 43 (86%).
This week: No. of Stocks above 10-Day SMA: 4 (8%) No. Of Stocks above 50-Day SMA: 11 (22%). No. Of Stocks above 150-Day SMA: 37 (74%).
This chart clearly shows how the 50 Leaders float between Overbought and Oversold levels (see circles) compared to the 10-Day Simple Moving Average (blue Line). The blue line is once again below 20. Just how long it stays there will probably decide whether the market turns bearish or bullish. A quick dip into the Oversold and then out again would be bullish (as occurred in early October) – a prolonged stay (as occurred in mid-October) would be bearish. The Stocks above the 150-Day Moving Average is now decisively below the Overbought area and headed down. This is another bearish development.
ADVANCERS AND DECLINERS
The Advance/Decline Line weakened this week. It has hit resistance and turned down below the 13 and 34 Day MAs. It needs to break below the low in October to confirm a downtrend.
Chart Nine – Advance/Decline Line
Chart Ten – Advancing Volume
The Advancing Volume Chart shows the volumes going into advancing issues. Up till the end of October, this chart regularly spiked up above the 2Billion area. It has not managed that in November, and now it has spiked down to its lowest level, on this chart, since before the major retracement in June/July. Now if this is a one off event, the market will bounce back. But the trend is for lower volumes and we may be in for a repeat of June/July when the chart spiked down below 500Million level five times before it finally broke the downtrend in mid-July.
CHANNELS AND BOLLINGER BANDS
Chart Eleven – Channels
The market is currently in a counter trend channel within the main uptrend channel which began in early March. That’s the dominant force in the market. Chances are that the market will resume the uptrend in the near future as the first half of each month recently has been strong. But – a break of the red-dotted channel line and a drop below 4515 would be very bearish.
Chart Eleven – Bollinger Bands and 50 Day SMA
This chart provides another way of conceptualising the trend. The mid-line shown above is the 50-Day Simple Moving Average. Above and below are three lines each is One Standard Deviation further away from the mid-line. Since this bull rally began in early March, the XAO has spent most of its time above the +1 Standard Deviation Line. This is the Buy/Sell Line. Pull-backs are clearly shown dropping below that line, and the resumption of the trend has been signalled when the XAO climbed back above the +1 SD Line. Only once (before Friday), has the XAO fallen below the Sell Short Line, which is -1 Standard Deviation below the 50-Day SMA. That was not a decisive break and the XAO quickly recovered. It also dropped below the -1SD Line on Friday. If it recovers quickly, as it did in July, then the probability of the major uptrend reasserting itself is strong. If the XAO continues to drop below that line, then this market is in trouble. CONCLUSIONS
The theme of this week’s report is, I think, quite clear. The market is currently in a counter-trend channel. Until the main uptrend can reassert itself, this sends a “stand aside message” for the medium term investor. For the long-term investor, they can still adhere to a “hold”, but if the market drops below 4515 and below the main uptrend channel, they might, perhaps, consider lightening their position with the idea of exiting completely if the 13-Day SMA breaks below the 150-Day SMA
The weak down trend is confirmed by:
1. The break of the currency below its supporting uptrend line.
2. The agreement by both the XAO Daily and Weekly MACDs to break below their respective signal lines.
3. The break by the XAO below the uptrend line from July.
4. The weak Advancing Volume figures.
5. The decisive drop in numbers of the 50 Leaders above the 150 Day SMA below 80% and still headed down.
6. The overall weakening in the number of Sectors registering positive on the Sector Ratings.
7. The continued weakening of leading indicators: 10 Year Bond Yield and the Shanghai Index.
The concurrent break below their respective signal lines by both the Daily and Weekly MACDs is a major concern for me. This is usually a powerful bearish signal.
Does this mean the market will continue to fall here? No – the market can do anything it likes. The counter-vailing force is the strong uptrend the market has been in since March. The market is currently oversold so we can expect a bounce back for a day or two after the big drop on Friday. If that bounce can be sustained, then the main uptrend will reassert itself. If the bounce peters out after a day or two, look out below.
We’re coming into a seasonally favourable time of the year. The beginning of the month is usually strong and December is one of the strongest months of the year. This counter-trend in the Indices may be coming to an end. Continue to watch the indicators and trend channels for guidance.
(20min delay)