The All Ordinaries (XAO) had a down week this week, -1.87%. Only three out of ten S&P Indices were up. These were: Telecommunications (+1.2%), Information Technology (0.04%), and Consumer Staples (+1.6%). Two of these are classic defensive sectors. Information Technology was basically flat, but you may remember that it out-performed the XAO during 2008 by a large margin. The worst performers were Materials (-2.82%) and Energy (-3.26%). These are the classic cyclical/growth sectors. Risk is clearly coming out of the market. This is confirmed by comparing the performance this week of the 50 Leaders (-1.82%) with the Small Ordinaries (-2.75%). The Small Ordinaries are generally considered to be riskier than the 50 Leaders and tend to under-perform in bearish markets and out-perform in bullish markets
The XAO on a monthly basis (20 Trading Days) was down, -2.69%. The winners for the month were Health (+2.7%), Telecommunications (+1.73%), and Consumer Staples (0.23%). All three are defensive sectors. The worst performer was the Utilities Sector (-6.8%); followed by Materials (-5.89%). Utilities is another classic defensive sector. Its under-performance in the past month is something of a surprise to me. It is not a sector that I follow with great interest so there may be idiosyncratic reasons for its under-performance. It is of interest, however, that towards the end of last week, the Utilities sector was performing relatively well
Last week was wait-n-see week: this week was confirmation of bearish sentiment evident since the high back in late-May.
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GENERAL OBSERVATIONS
This week I intend revisiting some of the main themes I’ve presented during the past few weeks. During that time I’ve presented several themes most of which were hypothetical in nature. Those hypotheticals now appear to be playing out. It’s still early days – but the probabilities have now strengthened.
1. The Upward Sloping Expanding (bearish) Wedge. Last week, the XAO fell below the lower supporting trend line of this pattern only to finish above it. This week, the XAO once again finished below the trend line. Given the experience of the previous week, this may once again be a false break. But the second break of this trend line does seem ominous if not conclusive.
2. The 34-Day Moving Average provided support during the sideways consolidation back in May. The lower, supporting trend line of the Wedge and the 34-Day Moving Average have been more or less moving in tandem since May. Again, the XAO has broken below this important support for the second time in two weeks.
3. The Health:Energy Ratio. This is a Defensives to Cyclicals ratio. Some time ago I suggested that a change to the upside in this ratio chart in favour of Health over Energy would signal the end of this bullish rally. (Remember, this is relative performance not absolute performance.) About two weeks ago, this ratio chart completed a double bottom which took about six weeks to form. The ratio is now consolidating above the 65-Day SMA (13-Week SMA). A cross of the 21-Day SMA above the 65-Day SMA appears imminent. A completion of that crossover would confirm the bearish tendency.
4. A ratio chart of the Materials:Consumer Staples (Cyclical to Defensive)adds further weight to the bearish suggestions. This chart has been in an upward sloping (bearish) wedge since mid-November 08. The pattern within the Wedge has taken a typical ABCDE path. It has now broken to the downside of the up-trending supporting base line. Again, the break does not appear decisive so far; but the direction appears ominous.
5. The Cascading Waterfall. This theme looked at the constriction of the Bollinger Bands (50DSMA - middle line, two standard deviations) which resulted in the two big cascading waterfall declines of the bear market. The first began in late 2007. At that time, the gap between the top Bollinger Band and the bottom Bollinger Band had narrowed to 432 XAO points. The gap currently stands at 405 points. Narrowing of Bollinger Bands does not predict direction, only that a move of some magnitude will come soon. Given the relative seasonal weakness of this time of the year and the current weakness in the XAO, it seems reasonable to argue that the move will be a continuation of the current weakness – perhaps dramatically.
Conclusion: All of the above suggest that XAO/XJO is in at least a counter-trend correction which may turn into a major down trend or, at best, a slow sideways to downwards consolidation.
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INDICATORS
The ALL ORDINARIES INDEX (XAO):
Long Term (Monthly): MACD: Negative, histogram is rising, Positive RSI: 34.5. Falling. Negative Slow Stochastic: 84.72. Overbought. Turning down but above signal line. DMI: negative. Trend: Down.
Medium Term (Weekly): MACD: Positive. Histogram – heading down – Negative. RSI: 54. Positive Slow Stochastic: 45.8. Negative cross below signal line. DMI: Flat. A cross of the DMI+ below DMI- appears imminent. Trend: Up
Short Term (Daily): MACD: Negative. RSI: 45.5. Neutral. Slow Stochastic: 28.1. Below its signal line. Positive. DMI: Negative. Trend: Sideways.
The Medium Term Indicators have weakened in the past week. Short term, the indicators are negative or neutral. Overall they are much less supportive of any up move than they were last week.
Trading in the last couple of days was a bit "weird". Thursday, the market ended flat. The ratio of Up Volume to Down Volume was a relatively strong 2.3. Friday the market was distinctly down by over one percent. The ratio of Up Volume to Down Volume was flat at 1.006. So some big punters were still pouring money into some of the stronger stocks. This suggests that the early part of next week could be up.
50 LEADERS
No. Of Stocks above 50-Day SMA: 17 (34%). No. Of Stocks above 150-Day SMA: 18 (36%).
The number of stocks above the 50-Day SMA has below the 50% level and has the potential for further falls and the trend is negative.
Eighteen stocks (36%) were above the 150-Day SMA. This is a bearish reading and the trend is negative.
No. Of Stocks above 10-Day SMA: 12 (24%)
Another negative reading and the trend is bearish.
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-. Forty stocks are now in the non-trending category. Only five stocks are trending positively and five trending negatively. This is a relatively neutral reading.
Many of the stocks in the non-trending category are tagging the lower Bollinger Band or are close to it. This suggests a short-term upward movement. This agrees with the divergence between the UpVol:DownVol Ratio and the trend in the general market.
In the general picture, however, any bounce is likely to be short lived before the downtrend is resumed. But – anything can happen on the stock market.
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CONCLUSIONS
The Australian market was down this week. Most of the themes described in the past few weeks suggest that the market is looking at further downward movement. Early next week may see some strength before the downtrend reasserts itself.
(20min delay)