This report is for conservative investors with medium to long term investment horizon. It may provide a valuable context for shorter term traders.
MARKET SUMMARY
The All Ordinaries (XAO) was up a strongly this week at +4.1%. The standout winner on the week was the Metals and Mining Sector, up +8.2%. This was helped by big rises in BHP and RIO on Friday as a result of the joint venture announcement for their iron projects in W.A. and the dumping of the Chinalco deal. The other major movers were the Small Ordinaries and the Industrials, both up over +5%. Losers on the week were the perennial Health Sector (-0.2%) and Gold (-1.4%). 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 +1.3%. The biggest winners for the month were Gold and Property Trusts. The Property Sector was up +11.8% and Gold up +9.6%. The Energy and Financials (less Property) joined the defensives (Health, Utilities, Telecommunications and Consumer Staples) as losers on the month. It seems that the Materials Sector (which includes Metals and Mining) is now the main factor keeping this market up. More on that in the General Observations.
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GENERAL OBSERVATIONS
This newsletter is for conservative investors who want to make investments on the long side of the market and who take a medium to long term view of the market. According to the Indicators suggested for use by such investors, the market has given a buy signal but hasn’t fully complied with the short-term entry requirements. First, the short-term entry requirements state that the Daily Slow Stochastic must not be over-bought (above 80). Second, to give a signal the Daily Slow Stochastic must be heading up and above its signal line. The Daily Slow Stochastic is currently in the over-bought zone. It could comply with the entry requirements in two or three days.
Now – that leaves me in a quandary. I’ve been touting for some time the bearishness of the expanding wedge (or cone) in place for two months – which still remains in that pattern and has not yet completed by breaking out either upwards or downwards.
The chart of the XAO is further complicated by the possibility of a complex reverse H&S pattern which has developed over the past six months. The chart (on a close basis) finished above the neckline on Wednesday, then fell below the neckline on Thursday, to finish right on the neckline on Friday. This formation does not show one classic feature of an Inverse H&S in that the classic form has volume decline from left to right, while this current pattern has volume increasing from left to right to reach multi-year highs in the past week. I think that is enough to discount this as an Inverse H&S Pattern
Other negatives include:
1. Negative divergences on Daily MACD 2. Over-bought readings on both the Daily and Weekly CCI. 3. Negative divergence on the weekly ROC. 4. Negative divergence on the short-term 2-Day MA of the daily Force Index. 5. The Percentage Volume Oscillator is showing a resistive (negative) volume thrust.
Of course, the market may resolve all this by heading downwards sharply over the next week or so and breaking below the supporting trendline of the expanding wedge.
With so many negatives, that seems likely.
Now – let me come to what I believe is the cruncher in all this speculation. And we return to the pointer I made earlier, that the main factor forcing this market up now is the Materials Sector.
The chief reason the Materials Sector has been so strong in recent months has been weakness in the US$. When the US$ is falling, commodities such as Iron Ore become more expensive and this benefits the Australian commodities producers like BHP and Woodside Petroleum.
Now, yields on all bonds in America are starting to head north, sucking money into America and causing the American Dollar Index to rise and will surely continue to rise.
In the chart of the AUD/US$, the AUD is now sitting at a previous Congestion Zone and is likely to either trend sideways or, more likely start to drop causing the Materials sector and the general market to drop. With the Financials (ex Property Trusts) already very weak, and the Energy sector beginning to weaken, if Materials also start to weaken, we can look at a return to bear market conditions.
But, I hear you say, there is no sign in the above chart of any obvious drop. Maybe not yet. But the Chart of the AUD/US$ relative to the 50-Day SMA going back to August 07 gives a sobering picture.
The Relative Strength reading is now at a multi-year high and showing clear signs of a bearish loss of momentum and a bearish rising wedge.
Given the problems in the US Bond market and the likelihood of more interest rate increases in that area with a flow-on to a stronger US$, the prices of commodities are likely to drop with clear bearish results for the Australian market. (On Friday night, our time, the 5-Year Treasury Bond Yield went ballistic, 11.4%. But that was nothing compared to Short-Term Yields, up +33.3%.)
The US$ Index has already lifted above the magical 80 level, the Daily MACD has broken above its signal line, and the Index has broken above its short-term trend line. It ain’t looking rosy for the Aussie Stock Market, particularly Materials, Energy and Gold. Other main sectors were sick anyway.
The Shanghai Composite Index is at new weekly highs but it also is looking sick. It has formed an upward sloping bearish wedge which looks like completing soon. The Histogram on the Daily MACD is within a whisker of turning negative.
To add to the bad news ECRI’s FIG Index (Future Inflation Growth) has just risen above its 3-Month Moving Average.
So, inflation is beginning to raise its head once again in America. That will put further upward pressure on interest rates.
What’s BIG BEN gunna do now? Music Maestro!
If you go out in the woods today You're sure of a big surprise. If you go out in the woods today You'd better go in disguise.
For every bear that ever there was Will gather there for certain, because Today's the day the teddy bears have their picnic.
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INDICATORS
The ALL ORDINARIES INDEX (XAO):
Long Term (Monthly): MACD: Negative, histogram is rising, Positive RSI: 37.6 and rising – above the downtrend line from Oct. 07. Positive Slow Stochastic: 90.1. Overbought. DMI: negative. Trend: Down
Medium Term (Weekly): MACD: Positive. Histogram – heading down – Negative. RSI: 56.5. Positive. Slow Stochastic: 61.34. Above its signal line and heading Up. Positive. DMI: Positive. Trend: Up
Short Term (Daily): MACD: Positive. Negative Divergence to Price RSI: 62.6. Positive. Negative Divergence to Price Slow Stochastic: 82.3. Overbought. DMI: Positive. Trend: Up.
Looking at the raw figures for the Indicators, the picture is very positive. The only one giving pause on the Medium and Short Term sets is the over-bought reading on the Daily Slow Stochastic. The Negative Divergences, however, suggest that this positive picture may not last.
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50 LEADERS
No. Of Stocks above 50-Day SMA: 36 (72%). No. Of Stocks above 150-Day SMA: 29 (58%).
The number of stocks above the 50-Day SMA is once again climbing upwards, and, although not overbought, is still a high reading.
Twenty-nince stocks (58%) were above the 150-Day SMA – this is a bullish reading.
No. Of Stocks above 10-Day SMA: 35 (70%)
This short-term indicator has lifted this week in line with the rise in the XAO.
These figures are consistent with a bullish market with room to move higher.
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. The trending stocks show a bullish picture, with 20 trending positively and only four trending negatively. (These are very crude measures and shouldn’t be applied to individual stocks, but give a reasonable picture of the health of the market as a whole.)
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CONCLUSIONS
Much of what I’ve said in the General Observations is speculation about what might happen to the Australian market. I’m pessimistic. (Now, which pills am I supposed to take? Is it the blue ones or the pink ones?)
The Indicators are generally positive and have room to allow the market further upward movement. If the Indicators generally remain positive and the Daily Slow Stochastic joins them, then it is time to join the bulls. But be prepared to bail out, and quickly.
(20min delay)