XJO 0.74% 6,710.8 s&p/asx 200

redback report - last for 2009

  1. 8,865 Posts.
    lightbulb Created with Sketch. 2564
    This week's report is a little longer than usual as I've included some review of the year. If you want to know the guts of what I say - just skip down to the end where I make some concluding remarks.

    WEEKLY MARKET SUMMARY

    This week was a shortened week with just over 2 days trading. The obligatory Santa Rally continued this week with the market up 1.6% after being up the previous week 2.4%. Wednesday was a reversal day but then Thursday came out and made up Wednesdays intra-day loss plus a little. The volume was the lowest for the year and lower than any day in the corresponding festive season in 2007 and 2008. Given the very low volume, the action on Friday appears suspect. With such low volume, big players are able to push the market around to suit their own short-term aims.

    No S&P Industry Sectors were down this week. The weakest sectors were Health (+0.11%) and Utilities (0.51%). The best performers were Consumer Staples (+2.44%) and Energy (+1.71%).

    Best Three Sectors:

    Consumer Staples: +2.44%
    Energy: +1.71%
    Financials: +1.69%

    Worst Three:

    Information Technology: +0.94%
    Utilities: +0.51%
    Health: +0.11%

    Among the sub-sectors: Property Trusts were up, +2.3%; Metals and Mining were up +1.53%; and Small Ordinaries, 2.19%. The 50 Leaders was up at +1.47%. Risk Aversion/Risk Taking was biased to the Risk Taking side. Gold Mining was again relatively flat for the second week after its big correction, +0.21%.

    Internationally, Shanghai was up strongly for the second week in a row. Hong Kong was up a little on the week and the Tokyo was up marginally after falling sharply on the last day of trading. The Dow had a very bearish day on the last trading day of the year to be down marginally on the week and still within its trading range. The S&P500 had a down week and is now back within its trading range after breaking out the previous week. That is often a bearish sign. London was up a little on the week and broke above its recent consolidation. Given the lead from the Dow, London will probably be down on Monday and back within its trading range a bearish sign. Copper was up on the week and set a new year high, while the Commodities Index was up marginally. So, the Santa rally, worldwide, was a rather uneven event this past week. The bearish day in America on the last day of the year, suggests a poor start to the New Year. However, it occurred on light volume. One-day events at this time of year are suspect because of light volume. Follow through the next day might suggest that something is brewing, but until confirmation is provided it just may be the boyos playing games.

    Chart One Weekly % Change Indices



    XAO (All Ordinaries), XUJ (Utilities), XTJ (Telecommunications), XSO (Small Ordinaries), XPJ (Property Trusts), XMJ (Materials), XMM (Metals and Miners), XIJ (Information Technology), XNJ (Industrials), XHJ (Health), XGD (Gold Miners), XXJ (Financials less Property Trusts), XFJ (Financials including Property Trusts), XEJ (Energy), XSJ (Consumer Staples), XDJ (Consumer Discretionary), XFL (Fifty Leaders)

    A LOOK AT 2009

    Chart Two One Year % Change Indices



    The market as measured by the XAO was up strongly for the year, +33.5%. The only sector to lose ground was Telecommunications, -9.89%. The other poor performers were also defensive sectors: Utilities (+1.64%) and Health (+2.78%). The best performer was Information Technology (+52.54%), followed by Materials (+45.74%) and Consumer Discretionary (36.72%).

    As expected in a strong bull year, Small Ordinaries (+50.95%) outpaced the 50 Leaders (+30.06%).

    Property Trusts performed poorly (-1.93%.)

    Among the 20 Leaders, Rio Tinto was the best performer (+92.2%) followed by Commonwealth Bank (+87.84%) and Wesfarmers (76.7%). One has to wonder how much value is left in those stocks after such big rises. Its usually bad policy to jump into the best performing stocks in the next year expecting a repeat performance. That doesnt mean to say they wont do well but dont expect them to repeat those gains again. The weakest blue chips were: Telstra (-10.91%), Brambles (-7.92%) and Westfield (-5.5%).

    For those chasing dividend yield for income and the safety (?) of a big blue chip stock, following is a bar chart showing dividends as at the end of the year for the 20 Leaders. Youll notice that two of these (Telstra and Westfield) were amongst the worst performing stocks in 2009

    Chart Three Dividend Yield 20 Leaders



    The best six dividend payers are: Telstra (8.3%), Westfield (8.0%), National Australia Bank (5.3%), AMP (5.2%), FGL (5.0%) and QBE (5.0%).

    Note: Telstra and Westfield were among the worst performers in 2009 as far as stock price is concerned. Buying these to gain the dividend would also suggest that you expect the stock price to do better in the coming year otherwise it might not be such a good buy. But buying high dividend yielding stocks as a long-term investment procedure has a good record just dont expect to get price gains every year. One needs a 10-year investment horizon to benefit from such a procedure.

    THE DECADE TREND, CHINA AND BLACK SWANS

    Two weeks ago I presented the Decade Trend which suggested that Year 0 of the Decade is usually a poor year for the market. Last week, I suggested that 2010 was facing a triple whammy: Year 0 of the Decade, Year Two of the Presidential Cycle (usually poor for the stock market), control of the three arms of government in the U.S. in the hands of the Democrats (Presidency, Congress, Senate) also usually poor for the stock market.

    At the last Brisbane Meet-n-Greet for Investors that I attended, I indicated that I thought Australia would weather any coming storm because of the strength in China to which our materials exports are aligned and on which the strength of our economy depends. Well, the assumption is that China will remain strong. The mainstream press provides consistent support for such a position.

    However, Ive read a recent report on Chinas prospects which suggests that Chinas prospects may not be so rosy. The full report can be accessed at:

    http://www.pivotcapital.com/research.html.

    The beginning of the report states: "In this report we describe the background to and the extent of the capital spending bubble in China and identify factors that will precipitate its deflation. We focus on Chinese capital spending firstly because it is the single most important driver of current Chinese and global growth expectations and, secondly and more importantly, investment-driven growth cycles tend to overshoot and end in a destructive way."

    This report is complex, detailed, well written, well researched and credible. I'd recommend that any China enthusiasts read the report - it just might give you some reason to re-think your position.

    If the scenario presented in this report pans out, then we can expect the Chinese stock markets to drop precipitously and have a flow-on effect to other stock markets around the world. This would particularly impact the Australian market as our big exporters are in the materials sector dependent on continuing growth in Chinese infrastructure.

    The bursting of the China bubble could be the cause of a poor performance in 2010 for world stock markets.

    Or we just might experience a Black Swan. Detailed by Nassim Taleb in two of my favourite books (Fooled by Randomness and The Black Swan, the Impact of the Highly Improbable). In recent times, a clear example of a Black Swan was the destruction of the Twin Towers in 2001 by terrorists.

    Black Swans, by definition, are difficult to predict but have a huge impact socially and economically. If 2010 is to be a particularly poor year on the stock market, then it might entail a Black Swan event. Here are a few examples of what might occur. (And they are all probably wrong.)

    1. Sovereign default by a Western industrialised nation (similar to Dubai World and Iceland). Prime candidate would be one of the PIGS (Portugal, Ireland, Greece, Spain).

    2. Israel attacks Iran to destroy its nuclear weapons capability. Oil price rises over $200 barrel.

    3. Taliban take Peshawar and threaten Lahore. Pakistan petitions America for military assistance. Obama commits 50,000 troops to the struggle. Widespread civil unrest over the action in America.

    4. Korean tensions escalate and the Korean War is renewed.

    5. Al Qaeda launches simultaneous nerve gas attacks on the underground systems in London, Paris, New York, San Francisco and Berlin.

    If the Shanghai stock market implodes. Be prepared. Exit holdings immediately.

    If a Black Swan occurs, be prepared. Exit holdings immediately.

    I dont wish to be alarmist, but it does worry me when the mainstream media is getting all warm and fuzzy about the future.

    Is there any sign that a calamity is near? Simply No!.

    Until the 13-Day SMA crosses below the 150-Day SMA on the XAO (see below in Long Term Trend) we must presume the trend is up.

    In fact, there is some evidence that in at least the medium term, the trend of the XAO will continue upwards. Heres the ratio chart of Gold/XAO this has just turned bullish for stocks and bearish for Gold (in Ozzie Dollars).

    Chart Four Ratio Chart Gold:XAO



    Its important not to be lulled into a false sense of security and be unprepared for when/if a Black Swan occurs. A first step in successful investing is the preservation of capital.

    LONG TERM TREND

    The long-term trend is determined by the 13-Day SMA and the 150-Day SMA. It is currently positive.

    Chart Five XAO with 13/150-Day Moving Average Cross-overs.



    Conclusion: The market is currently in a sideways consolidation with the 13-Day SMA still well clear of the 150-Day SMA. This market is sending a hold message. . If the Index price moves above the high set in Mid-October, this would be an add signal for the long-term investor.

    MEDIUM TERM INDICATORS

    Chart Six Weekly XAO with Negative MACD.



    The Weekly MACD has crossed below its signal line. The MACD, RSI and Aroon Oscillator are showing negative divergences from price. These are all negative signals but secondary signals.

    The Index price is clearly at an important resistance area. A break above that concurrent with a move by the MACD above its signal line would be bullish. Further consolidation in the near future seems probable. A break below the 4500 area would be bearish.

    Chart Seven Daily XAO with MACD above Zero.



    This week, the Daily MACD is above the Zero line and above its signal line. RSI and Williams %R are both above their midlines. A test of the bull rally high is occurring. A break above that would be bullish. A retreat would keep the XAO within its consolidation zone. A break back below would be bearish.

    THE OZZIE DOLLAR

    The Ozzie Dollar, as expected, is now testing the neckline of the head-and-shoulders formation. A fall back here would be negative for the Ozzie Dollar and for our share market. The carry trade is a significant factor in the direction of our Dollar and our Share Market. The correlation, although not one-to-one, is significant. So further falls in our Dollar could have a negative effect on our share market.

    Chart Eight Australian Dollar



    The 13-Day Moving Average has now crossed below the 89-Day Moving Average this is bearish. It has, however, occurred, on a rising Dollar price which negates the bearish signal. A fall here would reinstate the bearish signal. A rise above the neckline of the Head-and Shoulders pattern would be positive for the Ozzie Dollar and our share market.

    SECTOR ANALYSIS

    Heres how the 10 S&P Industry Sectors fared, ranked from top to bottom for the past week. The ratings are in order of magnitude with the previous weeks ratings in brackets. Despite the improvement in the market, no sector rated 100 this week while the previous week two sectors scored the maximum. In the negative side of the list, two sectors improved, two remained steady and one declined. On the basis of those scores, the defensives had a slight edge. Nothing in these figures suggests we are in a bear market (all defensive sectors are negative), thus confirming the long-term trend chart (above). Consumer Staples was the big improver mainly on the back of Wesfarmers which has been having a stellar year.

    S&P INDUSTRY RATINGS:

    Information Technology: (+100), 95
    Industrials: (+100), +95
    Financials: (+50), +50
    Materials: (+50), +45
    Consumer Discretionary: (+40), +40
    Consumer Staples: (-70), -45

    Utilities: (-55), -50
    Health: (-55), -55
    Telecommunications: (-50), -70
    Energy: (-100), -100


    For the market to return to a bullish stance, Consumer Discretionary (XDJ) needs to decisively outperform the Consumer Staples (XSJ) on a ratio basis. It is still unable to break above the declining trend line.

    Chart Nine RATIO XDJ:XSJ



    50 LEADERS

    Last week:
    No. of Stocks above 10-Day SMA: 46 (92%)
    No. Of Stocks above 50-Day SMA: 34 (68%).
    No. Of Stocks above 150-Day SMA: 44 (88%).


    This week:
    No. of Stocks above 10-Day SMA: 49 (98%)
    No. Of Stocks above 50-Day SMA: 38 (76%).
    No. Of Stocks above 150-Day SMA: 46 (92%).

    Chart Ten 50 Leaders: % above 10, 50, 150 SMAs



    The market judged by the number of stocks in the 50 Leaders above the 10-Day Moving Average is now very overbought. Only one stock (Woodside) is not above its 10-Day Moving Average. Thats a signal for at least a short-term pull-back. The number of stocks above the 50-Day Moving Average is still not overbought which allows for further move up by the index after a short pull back.

    ADVANCERS AND DECLINERS

    The Advance/Decline Line has now broken upwards for a new high. This is a bullish development.

    Chart Eleven Advance/Decline Line



    Chart Twelve Small Ordinaries (Weekly)




    The XSJ (Small Ordinaries Index) along with the Advance/Decline Line tends to lead the market up during a bull rally. The Weekly Chart shows the XSJ has broken upwards from the recent consolidation and confirms the bullishness of the Advance/Decline Line.
    CONCLUSIONS

    The market is currently at a critical juncture. It is knocking at the year high set back in mid-October. (The main-stream press told us on Thursday that the market set a new yearly high. Well that is sort of correct and sort of not correct. It was a new high on a close basis but not on an intra-day basis. Given a choice, the mainstream press will almost always opt for the more optimistic of two choices where the market is concerned.)

    From a variety of viewpoints (Technical Indicators, Ozzie Dollar, Breadth, XDJ/XSJ Ratio, Gold/XAO Ratio) the market is giving mixed signals some bullish and some bearish. On balance, however, the picture is generally bullish. Given these mixed signals and the overbought nature of the 50 Leaders we can expect at least a short-term pullback. Then we may be able to re-assess the situation. A decisive break above the mid-October high would be very bullish. A break below the 4500 area would be bearish. That leaves a lot of wiggle room if the market does decide to pull back.

    Long-term, the trend is still up. The past 2- months appears to be a consolidation at the highs of the year. Such a consolidation normally breaks to the upside. So the weight of evidence in the medium-to-long term is still with the bulls until proven otherwise. January tends to be a good month for the market so seasonalities support a further move up.

    The Decade Trend and the Presidential cycle suggest a reversal to the downside sometime in the first quarter of 2010. Well continue to monitor that scenario closely. Remember that is just a scenario not a prediction. And watch for Black Swans they can appear at any time.





    Keep watching the blog for daily updates (Monday to Thursday). http://redbackmarketreport.blogspot.com/

















 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.