"Considerable technical damage was done to the market this week. Enough to call the end of the bull rally? Probably not. The market is now oversold (see 50 Leaders Section). If the market can recover here, then I think we must presume that the weakness of this week has been end-of-quarter shenanigans combined with some over reaction to negative economic news (American Fed and Jobs Numbers). So – let’s see how it plays out."
The market had a good week this week underpinned by the strong Ozzie Dollar.
MARKET SUMMARY
The general market (XAO) was up this week, +3.22%, recouping all of the previous week’s losses and then some. The index is now at a new bull rally high. The XAO is back above a rising 13-Day Exponential Moving Average.
Eight out of ten SP Industry Sectors were up. The only two sectors down were Health and Telecommunications. The Health Sector is dominated by export oriented stocks like CSL, Resmed and Cochlear. No matter how well these companies perform in their respective markets, they are being impacted by the strong Australian dollar. Telecommunications is dominated by Telstra, under threat from the Federal government. TLS is a natural defensive stock – not likely to outperform in a bull market; but the uncertainty about its future resulting from government policy has had a negative effect on its share price.
Of particular interest this week was the fact that only two out of the ten sectors outperformed the XAO. They were Materials and Financials. Of these, only the Financials recorded a new weekly bull rally high. This was a narrowly based surge lacking breadth.
Best Three Sectors: Materials: +5.44% Financials: +3.08% Information Technology: +3.08%
Risk Aversion was apparently absent with the two worst performers being Defensive Sectors while the other two Defensive Sectors were in the middle band.
Having said that, something is out of kilter. The Gold Sub-Sector (XGD) screamed up 11.73%. The Gold Index has been a consistent under-performer during the bull rally from March. This may be a ‘canary in the coal mine’.
Among the sub-sectors: Property Trusts up, +1.73%; Metals and Mining, +6.98%; 50 Leaders, +3.32%; and Small Ordinaries, +3.61%.
The 50 Leaders was marginally better than the XAO but slightly worse than the Small Ordinaries. Risk Aversion/Risk Inclination was evenly balanced according to these measures. So the appartent “Risk Aversion” evident in the readings of Telecommunications and Health may be due to other specific factors.
Following are graphs for the two leading indices that I follow: Shanghai Stock Exchange Index and 10-Year Bond Yields (TNX – American Bonds). Bond Yields had a strong week and now testing the down trend line. A decisive break above that would further support stock prices. Shanghai has been closed for six days for Chinese holidays. So that chart is old news.
Chart Two – TNX
Chart Three – SSE
SSE is locked between support (150DSMA) and resistance at the 65DSMA. (Shanghai has been closed for the past six trading days.)
GENERAL OBSERVATIONS
Last week I said: "Considerable technical damage was done to the market this week. Enough to call the end of the bull rally? Probably not. The market is now oversold (see 50 Leaders Section). If the market can recover here, then I think we must presume that the weakness of this week has been end-of-quarter shenanigans combined with some over reaction to negative economic news (American Fed and Jobs Numbers). So – let’s see how it plays out."
Well – we have the answer. The bull rally remains intact. The market’s strength was confirmed by the Advance/Decline Line which also broke upwards to new highs.
Chart Four – A/D Line
Ever onwards to Stock Market Nirvana!!!!! It certainly looks that way. But one should never become complacent. I mentioned above that something was out of kilter – Gold. Here is another factor to ponder. A market can only keep advancing so long as investors remain Risk Inclined and not Risk Averse. One way of assessing this by looking at the ratio of the Small Ordinaries to the Fifty Leaders. During Bull Markets the Small Ordinaries, as expected, usually outperform the 50 Leaders. Investors seek out risky investments and the 50 Leaders, while performing well, don’t usually do as well in absolute terms as the Small Ordinaries.
Below is the chart of the XSO/XFL for this bull rally which has actually proceeded in three stages: Rally One, Correction, Rally Two.
The momentum of the Small Ordinaries compared to the 50 Leaders (see blue trend lines) was less powerful in Rally Two than Rally One and the Ratio has now broken below its up trend line. It is also well below the high set in Rally One. A break by the 13DSMA (yellow) below the 65DSMA (orange) would confirm this loss of momentum. The 50 Leaders would then be clearly outperforming the Small Ordinaries. This still won’t guarantee a bear market – but the probabilities become much higher.
This market won’t start to drop until we see the Ozzie Dollar start to weaken. While the Ozzie is strong, overseas money will flood into this country – liquidity is high and much of that is supporting the share market. With the RBA lifting interest rates this week, the differential between Ozzie interest rates and the other major developed economies (Europe, U.S. and Japan which have effective zero interest rates) increased once again encouraging investors to invest in Australia to take advantage of the rate differential and favourable (for them) exchange rates. (EWA, the Tracking Stock for Australian Shares in America, has gone from $10.47 in March to currently be at a high on Thursday of $23.65 – a rise of 125.9%). And to fund that an investor can borrow money in America where the base rate is effectively Zero. That’s leverage.
This week the AUD/US$ broke above 90 cents. I’ve been suggesting for many weeks that the Ozzie would get into the 90-92 cent range with the possibility of parity. Well – we’re at that first line. Careful watch should be kept on the Currency for any decisive break lower. Until it does – the share market will continue to rally.
The Ozzie on the chart remains within the bearish rising wedge formation. It can still go higher. And it can break above the wedge – which would be a very bullish scenario.
So – the Phantom of the RBA has raised interest rates – because (he says) one of his main concerns was about a bubble in house prices. Well – all he’s doing is transferring a bubble in house prices to the stock market. And we all know what happens, in the end, to bubbles. In the meantime – enjoy the ride – but don’t forget to get off when the ride stops. (Who’d want to be a Central Banker? No wonder they all seem to speak in dull, measured monotones using tortured language? How do they sleep at night?)
Chart Six – AUD/US$
Following is the chart of Sector ratings. These ratings put most emphasis on major trends and less emphasis on recent market moves. Because of the emphasis on major trends, these tend to change with a glacial pace. But, if the Defensives flip into the positive half of the chart – this would have great significance for the return of the bear. This week, only minor changes have occurred – steady as she goes, cap’n.
Chart Seven – Sector Ratio Rankings
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 (and, wouldn’t you guess it, the only sector scoring 100 is the Financial Sector).
The only major change occurred in Information Technology which is the smallest segment in the market. When the defensives are in the positive part of the chart along with the 50 Leaders – we’ll know that a bear market is back with us. Until then we must presume that the line of least resistance for the market is up.
To Sum Up: 1. The strong bull rally resumed this week. 2. TNX (American Bond Yields) has continued to show weakness but the down trend could be ending. 3. The currency is once again showing strength, but could be close to an expected top. 4. The A/D Line has resumed a bullish stance. 5. The main concern is the medium term relative weakness in the Small Ordinaries.
INDICATORS
The All Ordinaries Index (XAO)
Short Term (Daily):
MACD: Negative. (OMG – LOOK at that negative divergence!!!!!) RSI: 62.7. Positive. (OMG – LOOK at that negative divergence!!!!!) Slow Stochastic: 80.65. Overbought.
Medium Term (Weekly):
MACD: Positive. Histogram shows a negative divergence from price. RSI: 67.67. Positive. Close to the overbought level of 70. Slow Stochastic: 78.53. Below its signal line and headed down. Negative.
To summarise: This is not a market to be buying into. This is a “hold” market. Daily MACD – Negative and with an “overbought” Slow Stochastic – this suggests further weakness ahead. Those negative divergences are a real worry. The weekly Indicators are also not signalling “buy”. Further strength is possible – but caution is the preferred course of action.
50 LEADERS
Last week:
No. Of Stocks above 50-Day SMA: 33 (66%). No. Of Stocks above 150-Day SMA: 44 (88%).
This week:
No. Of Stocks above 50-Day SMA: 42 (84%). No. Of Stocks above 150-Day SMA: 43 (86%).
Medium term the market is again “overbought”; but in a bull market, stocks can remain “overbought” for extended periods of time.
Last week:
No. of Stocks above 10-Day SMA: 6 (12%) This week: No. of Stocks above 10-Day SMA: 32 (64%)
Short term, the market is still not “overbought” – but not far off it. Any near term strength should be viewed with suspicion.
The New Highs/New Lows reading improved this week but the cumulative reading is still below the high set the previous week. This is a negative divergence from the 50 Leaders Index which set a marginal new high on Thursday. (Another negative divergence!) It should be noted that many of the New Highs were intra-day on Friday – and then fell back decisively. This may be an indication of a weakening trend.
CONCLUSIONS
This week the market recovered from the significant set-back of the previous week. The market, on the surface, is showing strength but internals (particularly Small Ordinaries) and divergent indicators are suggesting instability. Although the market is showing fragility, the AUD remains strong and this should support further upward movement. Any unexpected news or shocks could throw this market into a significant correction.
While the “Number of Stocks above the 150DSMA” remains above 50% and the weekly MACD remains positive, we must presume this bull rally is intact, albeit prone to sudden corrections such as we saw the previous week..
I’m not on the side of the doom’n’gloomers predicting a catastrophic decline. This rally, on big volume, has been too strong to be predicting catastrophe.
(20min delay)