snippets from my weekly report, page-3

Hi Noomxx,

I'll try to answer your questions.

COULD WE THEN SEE A SWITCH OUT OF MATERIALS BACK INTO THOSE SECTORS THAT HAVE UNDERPERFORMED. IF SO MIGHT THE MARKET JUST STABALISE AROUND THIS LEVEL.

A. If we are to see a switch, it will probably be a switch from growth stocks into defensives. (Health, Utilities, Telecommunications and Consumer Staples.) But not into Financials. If we start to see the market drop it will break the current uptrend line. Then probably all sectors will suffer but the defensives will suffer less than the growth stocks and may even improve a little. (These sectors will improve on a relative basis but not necessarily on an absolute basis. There may also be some improvement on a relative basis in the financials but not an absolute basis.) If my argument is correct, then rising interest rates will not only hurt resources but also financial stocks which do best in a low interest rate environment. But not in a rising interest rate environment which continually hurts their bottom line. Last week I noted that the ratio I'm looking to to confirm a bear market is the Energy:Health ratio. If we have a return to the bear, then Energy will drop more quickly than Health - giving the ratio an upward boost. But that won't necessarily mean that Health will improve on an absolute basis, only that Health is getting worse at a slower rate than Energy.

I DONT UNDERSTAND THIS WOULD YOU MIND EXPLAINING. A REVERSE H&s PATTERN MEANS THE MARKET IS TRENDING UP RIGHT?
THEN SURELY INCREASED VOLUME IS GOOD AS WE MOVE TO THE RIGHT, BECAUSE THEN THE MARKET IS BECOMING MORE CONFIDENT. IF VOLUME WAS DECLINING, THEN I WOULD BE MORE WORRIED AS IT MEANS CONVICTION IS LACKING AS THE INDEXES MOVE UPWARDS.

B. This is an empirical observation not a theoretical extrapolation. (See Bulkowski: "Encyclopedia of Chart Patterns). Probably the reason is that reverse H&S occur at the bottom of bear markets when people's confidence is at its lowest. So fewer and fewer people are willing to participate. Bear markets end when there are no buyers left, not when confident buying is taking place. This buying has reached the level of "irrational exuberance". I have volume records on the Aussie market going back over two years. The 5-Day Average is currently the highest it has been in the past two years which includes the tops of the Aussie Market in May 07 and October 07. The previous highest spike in the 5-Day Average volume was in early May 09. There is something wrong when a market has such extreme volumes - it looks like strong hands selling to weak hands. Insiders selling to retailers.

BUT THERE ARE OTHER SECTORS THAT ARE BEING HELD BACK BY THE STRONG AU$. SOME OF THE EXPORT ORIENTATED STOCKS, LIKE CSL, FOSTERS, CPU ETC. SO IF THE AU$ PULLS BACK, THEN THESE SECTORS MIGHT RUN?

That's possible. Notice that two out of the three stocks you mention are from the Health and Consumer Staples Sectors. The other one you mention is CPU which is in the Information Technology Sector. This sector also did well on a relative basis during the big sell off from Nov 07 to Nov 08. So yes, they are the sectors you would expect to do well on a relative basis. But this will not be enough to swing the market upwards and continue bullish or even move it into a sideways consolidation. (I normally ignore the Information Technology Sector in my discussions because of its minute market size.)

I'd also like to point out that sentiment in the American market is now skewed to the high bullish side. The ratio of bulls:bears is now back to the level seen in early January. That was not a good time to enter the market. So, is this a good time? Probably not. But I could be wrong.

It may be that there is a huge amount of money sitting on the sidelines waiting to enter the market. That might be what we are seeing in the volume pattern on the possible Inverse Head and Shoulders. It may be that we are seeing a liquidity bubble just waiting to burst into the stock market. But past experience in the psychology of the market is against such a proposition. But - maybe this time it's different. LOL

Cheers
Red