The general market (XAO/XJO) was weaker this weak, -1.18% (versus +4.42% the previous week). The XAO remains above the 13-Day Exponential Moving Average. Seven out of ten SP Industry Sectors were down. The sectors up were a mixed bag of Information Technology (+3.34%), Health (1.47%) and Consumer Discretionary (0.18%). Energy was the biggest loser, -3.83% finally losing some of the ground gained as a result of the Gorgon announcement.
No clear themes developed during the week with most losses relatively minor except for the Energy sector. The big mover in the sub-sectors was Gold, up 8.77%
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LEADING INDICATORS
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. This week the recent drops by these indicators are showing signs of weakening. The corrections could be over.
The Baltic Dry has broken down below its150-Day SMA. The variation in this index has been unusually small this week. The chart appears to have formed a bullish downward sloping wedge. A break above the top restraining line would be bullish for the BDI and for the general market.
The American Ten Year Bond Yield chart has been showing weakness for some weeks. It is now at a critical support level. Overnight it bounced upwards. Further moves upward would suggest that the correction is over. A break below the key support level would be negative for the stock market.
The Shanghai SSE has a marked double top and broken below the 65-Day SMA. It has now bounced strongly off its 150-Day Simple Moving Average in a clear reversal pattern. A break above the 13-Day SMA would suggest that the correction could be over.
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GENERAL OBSERVATIONS
It’s September, historically the weakest month of the year. The American market on Tuesday night obliged by having a big move down, and all the dogs were barking: "The Market’s Going Down". Australia followed suit on Wednesday. But I wonder: "Is this time different?" Despite the jitters there are no clear signs that our market is ready to go down. Thus has it always been in September. But – I still can’t see any signs. I can see jitters – just look at Wednesday’s action on our market.
But – take a look at the Advance/Decline Line. While the XAO finished down on the week, the Advance/Decline Line finished up on the week. We normally expect to see weakness in the A/D Line to precede a fall in the general market.
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.
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.)
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:
This is a picture of a market in its “mature” phase. The top four positions are occupied by sectors dependent mainly on the local economy (Financials, IT, Consumer Discretionary and Industrials). The relative strength of these sectors is probably due in large part to the Rudd government stimulus spending. The export-oriented cyclicals (Materials and Energy) are noticeably weak. But the weakest sectors, as a group, are the Defensives. Until we see those start to head up the table, this market is not moving back into a bear market. One can only wonder what will happen once the plug is pulled on the stimulus spending (which appears likely post the G20 talks). Any negative effect, if it occurs, will take time to show up in our economy. And our market is not yet signalling weakness in our general economy.
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.
Following are two scenarios for the Australian market. One is medium term bullish (then bearish), the other is medium bearish. Of course, both scenarios could be wrong. I’m sure you can come up with other scenarios.
Chart Six – XAO - Scenario One
This scenario is based on the following assumptions:
o Since the bear market began in late 2007, the market has made significant lows about every four months, give or take a week or two o The market is currently in a strong up-sloping channel o The next level of significant resistance is just under the 5000 level on the XAO. o The stock market is a mechanism for extracting as much money as possible from as many people as possible and giving it to a few very very rich people. So, if most people think the market is going down (the September effect), then the market will go up.
Chart Seven – XAO - Scenario Two
This scenario is based on the following assumptions:
o One of the most consistent seasonal effects in the markets is the September effect o The market was in an up sloping (bearish) wedge formation which invariably breaks to the downside. The chart broke below the supporting uptrend line this week. o The market is currently “overbought” and requires at least a significant bearish correction. o Anecdotal evidence suggests that the general public (e.g., taxi drivers, hair dressers) are now piling into the market (and using margin loans for their investments). These people always lose money in the stock market.
Chart Eight – AUD/USD
Significantly, the AUD/USD has broken above the recent consolidation and now appears headed for a target of 0.92 US cents. The currency has been above the 65-Day SMA since mid-March. Until the currency turns down, we must presume the bull rally in stocks will remain intact.
Conclusion: The strong bull rally weakened this week. Leading Indicators may have finished their recent corrections. The currency is continuing to show strength. Sector Analysis and the A/D Line provide no clear suggestion of a reversal. Until clear indications are received that a corrective move has begun, the trend is the trend is the trend. Scenario One is my preferred scenario.
INDICATORS
The All Ordinaries Index (XAO):
Short Term (Daily): MACD: Negative. Histogram shows a negative divergence to price. RSI: 59.69. Headed lower. Negative divergence to price Slow Stochastic: 19.56. Oversold.
Medium Term (Weekly): MACD: Positive. Histogram shows a negative divergence to price. RSI: 63.44. Positive. In a strong uptrend since November 08. Slow Stochastic: 74.93. Headed down and below its signal line. Negative.
Conclusion: The Slow Stochastic daily overbought readings have been worked off suggesting that a bounce is possible. The Weeklies are mixed; but until the RSI breaks below its uptrend line, any weakness in the general market is likely to be short lived. The Weekly chart trend is strong and showing no sign of reversing.
50 LEADERS
No. Of Stocks above 50-Day SMA: 41 (82%). No. Of Stocks above 150-Day SMA: 43 (86%).
These readings are below the extra-ordinary readings of three weeks ago; but still show a market which is over-bought. Those readings can remain at such high levels for some time.
No. of Stocks above 10-Day SMA: 22 (44%)
The short-term readings are in the neutral zone and provide no clear direction one way or another.
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 30 stocks (60%) are trending positively. This compares to 31 stocks (62%) the previous week. The number of non-trending stocks has risen to fourteen (28 per cent), the same as last week. The number trending negatively has dropped from nine to six (12%). Again, there is no clear sign in these figures that the market is weakening to a bearish stance.
FINAL CONCLUSIONS
This week the market weakened, heightening fears that the September Effect had begun.
There is, however, no clear sign that the trend is changing and the market has worked off short term overbought conditions and could easily move higher. With the A/D Line advancing along with the Ozzie Dollar, it is difficult to make a bearish case in the short term. Divergences on the main indicators suggest, however, that it is a matter of when not if for the next significant move down. And I’m not talking about a 2-3% move down, but a major correction.
It’s difficult to buck the long history of the September Effect. This market has shown no clear sign of reversing. Despite the move down during the past week, I’m inclined to think that there is room for more upward movement in line with the strong weekly trend. When the last bear has said: "I give up, this time it is different." 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. My mantra is: Don’t pre-empt the market.
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