Here are some news highlights I’ve picked out from the past week:
1. In the latter part of this week, economic news from America was dominated by the efforts of American legislators to bail out the 3 Small Auto Makers who are facing backruptcy. News of the failure of this plan caused the Aussie share market to dive just as it appeared to be set up for a nice reversal day on Friday
2. Then later, after our market closed, news came through that the American Treasury (read Hank Paulson) would likely come to their rescue with funds from TARP (Troubled Asset Relief Program). So the American market after tanking early had a nice reversal day, setting up a good day for Australia on Monday. (Got a lazy $2 Billion dollars? That’s all it would take to buy General Motors, then you could be proudly making Cadillac Escalades and Hummers that nobody wants.)
3. Japan, America and Europe are all now in recession. This is the first time since World War II that the three biggest economies in the world have been in recession simultaneously. Russia (along with some lesser lights) has joined this growing crowd.
4. Chinese trade is collapsing. Exports dropped 2.2% in November from a year ago, but imports shrank an alarming 17.9%. Meanwhile, Mr Rudd continues to state that Australia’s economy will do better than most other developed countries because of our trade ties with Asia. We shall see; but those Chinese figures are not looking good for Australia. Tie that with the collapse in general construction/home building in China and things don’t look good for us. (The Age reported that real estate sales volumes have plunged 50% this year in key cities including Shanghai, Shenzhen, Wuhan and Xiamen.
5. In Australia, the Westpac/Melbourne Institute Consumer Confidence showed a sharp jump, up 12.1% in the past two months and up 16.4% from its low for 2008. (Remember I said a few weeks ago that a change in the Consumer Discretionary/Consumer Staples Ratio to be positive on the Consumer Discretionary side would suggest that this bear market in stocks is coming to an end? Well, those Consumer Confidence figures are good signs. The Ratio itself has shown a small positive rise. Not enough to get excited about, but enough to suggest some hope.)
6. The CRB Index of Commodity Prices had a good week up +8.8%. A resurgence in this index would be positive for the Australian economy. Again this move is too small to get excited about, but enough to suggest some hope.
7. Infrastructure is the new black. The incoming American administration has announced huge infrastructure spending. The Chinese Government has announced huge infrastructure spending. The Australian Government has announced huge infrastucture spending. These spending initiatives are expected to stimulate the respective economies.
8. The Baltic Dry Index finally appears to be bottoming out. The BDI rose 15.2% this week. The rise is almost imperceptible on a long-term chart, coming as it is off such a low base. But, once again, this is a positive development.
How has our market reacted to this mixed bag of news?
The current dominant pattern is a bullish down-sloping wedge. The horizontal top of this wedge is the resistance line at 5200. Three weeks ago, the XAO dropped below this wedge (bearish) but climbed back into the wedge (bullish). It still needs to cross above the upper line of the wedge to confirm the bullish pattern. This week has been a week of consolidation with the XAO up +25.3 points or +0.74%. The drop below the lower boundary of the descending wedge (which caused me some angst when it occurred) now looks like an “exhaustion break”. It’s still too early to say, but a break above the upper boundary would be very bullish.
The past three weeks have seen higher lows than the one four weeks ago. The low for this whole bear market was four weeks ago at 3332.7. A drop below that level would be bearish. A higher high is required to begin a new up-trend. A rise above 3672.7 would be bullish, taking the XAO above key short term horizontal resistance. A break above that would suggest a rise to at least 4300 and possibly 5200. If we are to make it up to 5200 we are probably looking at a solid 2-4 month up trend.
Which way do I think we’ll go? Well, I am optimistic of a break upwards in the longer term (without pre-empting the market). The American market is showing some very bullish longer term indications. I detailed many of these in last week’s report. The reaction on Friday’s American stock market to the failure of the Auto Makers Bail-out plan was very positive. A few weeks ago, such negative news would probably have seen the market dive over 500 points (and a lot of people were suggesting that). Instead of which, after a brief drop, the market rallied to finish in positive territory.
However, on a shorter term framework, the American market shows indications of weakening:
o many of the major indices are showing bearish upward sloping wedges.
o The tick on the SPY (S&P500 Spiders) is at a level where retracements occur
o The Vix is in a symmetrical triangle, which has a 75% probability of moving up – bearish for the stock market
o Since bottoming in late November, almost all up days on the Dow have been on lower volume, which is very bearish.
The XAO is positive compared to one week ago and one month ago. The standout winners this week were the resource sectors (XMJ, XMM, XEJ, XGD). On a weekly and monthly close, the XDJ marginally outperformed the XSJ, although on an absolute basis both were negative. This out performance of the XDJ over the XSJ is positive for the stock market longer term, so long as the trend continues. The Small Ordinaries (XSO) were positive this week. This has been the worst performing sector (along with Property Trusts) during this bear market. Some bottom feeders might be nibbling at this sector. Once again, a turn around in its fortunes would be positive for the overall market.
My Inflation/Deflation Ratio has turned in favour of inflationary stocks (resource stocks). I’ll expect any return to bullish conditions to see these lead the market higher with big gains. This change is congruent with the small rise in the CRB Index mentioned above. Gold stocks, however, have seen such a good rise recently, I think we can expect at least a short-term retracement in those stocks. We shall see.
The INDICATORS
The All Ordinaries Index (XAO):
• The daily MACD is positive after showing a positive divergence to the XAO. This provides hope that the current rally may have more legs.
• The weekly MACD is negative (this is the “master signal). The MACD histogram is relatively flat showing a positive divergence to price. There is still no divergence on the MACD itself.
• The weekly Slow Stochastic is at 30.5 up from 26.97 last week. A reading above the 20 level is a signal for active investors to consider adding to holdings.
• The daily Slow Stochastic is at 57.9, midway between over-bought and over-sold. A turn up in this indicator from around the 30-50 level would be a good sign of a strong rally coming.
• Weekly RSI is at 27.56. This is still in the oversold range below 30. It needs to rise above 30.
• Daily RSI is at 40.65. It needs to rise above 50 for market participants to have confidence that a sustainable rally has begun.
Last week I said that conditions were setting up for a 2-4 month rally. Nothing has occurred this week to change that opinion. But – wait for price to confirm and we may have to endure a little more consolidation or weakness.
50 LEADERS
In the past week, indicators on the 50 Leaders have been relatively flat. All, except for one, have shown a small positive move.
The number of stocks positive on the weekly MACD has been static at 14 for the past three weeks (28.6%). (The weekly MACD is a lagging indicator and takes some time to respond to stock price movements.)
The number of stocks with a positive daily MACD rose from 35 to 37 (75.5%) this week. This is a strong figure at this stage of the bear market where the XAO is sitting just above the year low.
Stocks positive on both the weekly and daily MACD improved from ten to eleven (22.4%). These were:
ASX (Australian Stock Exchange), AXA (AXA Insurance) BXB (Brambles), GPT (General Property Trust), LGL (Lihir Gold), LLC (Lend Lease), MQG (Macquarie Group), NCM (Newcrest Mining) TEL (Telecom New Zealand), TLS (Telstra), TOL (Toll Holdings).
This week we have twelve stocks above the 50-day Simple Moving Average (24.5%). This indicator is showing a positive divergence to the XAO.
Eight stocks were above both the 50-Day and 10-Day Simple Moving Average. These were:
This week four stocks are positive on all four indicators (Daily and Weekly MACD, 50-Day and 10-Day Moving Averages). These were AXA, LGL (Lihir), LLC (Lend Lease), and NCM (Newcrest Mining). Two out of four are gold miners.
Eight stocks were negative on all four indicators: BSL (Bluescope Steel), CBA (Commonwealth Bank), CSL, GMG (Goodman Group), OST (Onesteel), SGP (Stockland), WES (Wesfarmers) and WOW (Woolworths).
Two of these (WES and WOW) are from the Consumer Staples sector and represent between them over five per cent of the All Ordinaries Index.
200-Day SIMPLE MOVING AVERAGE
A common indicator used to demarcate stocks in a bear and bull market is the 200-Day Simple Moving Average. I’ve checked how many of the 50-Leaders are above the 200-Day SMA and found some surprising results. Five stocks were above their 200-Day SMA. These were:
The sectors they come from are, respectively: Utilities, Consumer Staples, Financials, Gold Mining and Energy. The first two are traditional “defensive” stocks in a bear market. The big surprise was the much maligned IAG. The other surprise was the diversity in this group.
CONCLUSIONS
This week has seen a mixed bag of economic news while the Australian stock market has been in consolidation mode. After an initial bounce on Monday, I’m expecting a retracement in the market. The low at 3332.7 could be tested. If that support level is respected, then we may be on the way to a sustainable rally. But until the XAO confirms with a higher high (above 3672.7), conservative investors should stay on the sidelines.
(20min delay)