The following is meant for medium to long term investors in the market. For shorter term players it may provide some valuable context. I hope it is helpful.
MARKET SUMMARY
The All Ordinaries (XAO) was up a little this week at +1.5%. The standout winner on the week was the Property Sector, up nearly +10%. The other major movers were mainly in the resources sectors (Materials, Metals and Mining, Gold and Energy). This was a theme dominated by the dropping U.S Dollar and the rising Aussie Dollar. The other good mover was the perennial Small Ordinaries Index. Losers on the week were Health (-2.5%) and Financials less Property Trusts (-1.5%). Barely holding their head above water were the other defensive sectors besides Health: Utilities (+0.2%), Telecommunications (+0.9%), and Consumer Staples (+0.1%).
The XAO on a monthly basis (20 Trading Days) was up +3.4%. The biggest winners for the month followed the theme for the weekly winners: Materials, Metals and Mining, Gold, Energy and Small Ordinaries. The biggest winner was Gold, +12.9%. The biggest losers were the defensives: Utilities, Telecommunications, Health and Consumer Staples.
The gap between the Monthly rise (+3.9%) and the Weekly rise (+1.5%) is steadily narrowing, indicating the non-trending nature of the current couple of weeks.
......
GENERAL OBSERVATIONS
Last week, I stuck my neck out and said this market was going down. Well, not much has changed. The XAO/XJO are trending sideways for the past couple of weeks. The Charts of the Indices are trawling along the bottom supporting line of the expanding upward sloping wedge that I pointed out last week.
......
As I pointed out last week, such formations have a 76% probability of falling to the downside. Once a break occurs, a continuation downwards increases considerably to well over 90%. But – until it actually drops there is still that chance that it will head north.
On the Australian market, when it topped about three weeks ago, there was a resistive volume thrust. A resistive volume thrust occurs when high volume occurs when a stock or index hits a clear resistance line. In this case, the XAO pushed up against the 200-Day Moving Average (a common marker used by analysts between bear and bull markets) while volume rose to a level rarely seen except at Options Expiration time. This is a signal that shares have passed from strong hands into weak hands.
The XAO and XJO are currently caught in a pincer movement - below the 200-Day SMA which is dropping and above the 50-Day SMA which is rising. These two indicators are often taken as demarcation lines between the long-term trend and the medium-term trend. A break either way (above the 200 or below the 50) would bring these two indicators into sync and decide future direction. Clearly, I believe that direction will be down. But, it doesn’t matter what I believe, the market will do what the market does – and confound us most of the time. ☺. So we will continue to watch market action and disregard our personal beliefs. (Sometimes I feel sure that the Ancient Gods gave Loki the job of overseeing the share markets. Loki is known as the Norwegian God of Mischief, or, more bluntly, Bastardry.)
To round out the bearish theme, the CCI (Commodity Channel Index) on the weekly chart has dropped below 100. This is usually taken as a “sell” signal. But not until that supporting trend line is broken!
It seems that, for now, the only things holding up this market are the Materials, Energy, Gold and the Small Ordinaries. The Financials have taken a big hit. And the large caps (50 Leaders) are under-performing the general market. The dropping US dollar is supporting the Commodities in their rampage north, but that may be coming to an end soon. Energy and the Materials sectors tend to under perform in the second half of the year, so we may see topping action in those areas in the coming days or the weeks of June.
,,,,,,
The good news is that ECRI’s Weekly Leading Index has continued to head upwards. So, we may not be looking at a serious retracement. But – for now, the chart of the indices is the one to take the most notice of. (ECRI’s Weekly Index is a composite index based on American data and made up of: M2 Money Supply, ECRI industrial materials price index, initial unemployment insurance claims, mortgage applications, S&P 500, 10-yr Treasury bond yield, and bond quality spread.)
......
INDICATORS
The All Ordinaries Index (XAO):
Long Term (Monthly): MACD: Negative, histogram is rising, Positive RSI: 33.5 and rising – above the downtrend line from Oct. 07. Positive Slow Stochastic: 65.2 and rising – Positive. DMI: negative. Trend: Down
Medium Term (Weekly): MACD: Positive. Histogram – heading down – Negative. RSI: 52. Positive (Just). Slow Stochastic: 47.6. Below its signal line and heading down. Negative. DMI: Positive (Just). Trend: Up
Short Term (Daily): MACD: Negative. RSI: 55.3. Positive. Slow Stochastic: 62.3. Above its signal line and heading up. Positive. DMI: Flat. Trend: Sideways – consolidation.
Some of the key Medium and Short Term Indicators are still not confirming my suggestion of a retracement. But they are within a hair’s breadth of turning negative. Just one day’s significant decline would throw these indicators into negative territory.
50 LEADERS
No. Of Stocks above 50-Day SMA: 30 (60%). No. Of Stocks above 150-Day SMA: 26 (52%).
The number of stocks above the 50-Day SMA is now at 60%. This is a serious deterioration from two weeks ago when the reading was at 84%.
Twenty-six stocks (52%) were above the 150-Day SMA – this is now close to the demarcation between a bull and a bear market – giving further credence to the picture offered by the chart of the XAO.
No. Of Stocks above 10-Day SMA: 31 (62%)
This short-term indicator has lifted a little this week in line with the small rise in the XAO.
These figures are consistent with a market in consolidation.
I’ve also done some additional figuring with the ADX. It is usually presumed that a stock is not trending if the ADX is below both the DMI+ and the DMI-. Twenty-six of the 50 Leaders are in this category. This also coincides with the consolidation theme.
CONCLUSIONS
It is at times like this that the market likes to test the patience of its many participants. As Jesse Livermore (one of the greatest speculators/investors of the 20th Century) often suggested, it is important to be strategic and patient in the market. It is often better to do nothing than something. For the medium-term to long-term investor, now is such a time.
This bear market may have some time to run yet. This newsletter has consistently avoided any suggestion for about a year that one should enter this market. The past rally of nearly three months has tested the patience of those with itchy fingers. Others who trade on a shorter time span have made healthy profits. The longer-term investors will get their chance, and when it comes it will be very profitable. But not just yet. That may be in a few days – or we may have to wait a while yet. Anyway – that’s just how I see it.
(20min delay)