XJO 0.37% 7,359.0 s&p/asx 200

redback's market report week ended 24/12/09

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    Santa came in the past week for all the good little boys and girls. This week the market was up modestly, XAO +2.42%. Seasonality played out true to form this week, with the XAO up on the last three days of the four that the market was open. Only one S&P Industry Sectors was down this week, the hapless Telecommunications (-4.36%). Telecommunications continued downwards after the big fall the previous Friday. Telstra announced that it expected a flat income growth in 2010 due to domestic competition and a high Australian dollar. This was a reduction in previous guidance. The best performers were Information Technology (+4.36%) and Health (+5.33%). Health is dominated by a small number of stocks (CSL, RMD and Sonic Health Care) which gain the bulk of their revenue from overseas. The recent drop in the Australian Dollar seems to be the reason for the resurgence of this sector.

    Best Three Sectors:
    Health: +5.33%
    Information Technology: +4.36%
    Financials: +3.36%

    Worst Three:
    Consumer Staples: +2.09%
    Consumer Discretionary: -2.0%
    Telecommunications: -4.36%

    Among the sub-sectors: Property Trusts were up, +0.7%; Metals and Mining were up +2.2%; and Small Ordinaries, 2.36%. The 50 Leaders was up at +2.56% and performed marginally better than the Small Ordinaries. Risk Aversion/Risk Inclination was about even. Gold Mining was relatively flat after its big correction, -0.15%.

    Internationally, Shanghai completed a double top then bounced strongly off the 150-Day Moving Average to negate the bearish formation and finish up just a little on the week. Hong Kong was up a little on the week and still in danger of completing a head-and-shoulders top. The Dow was up, and at the top of the consolidation pattern of the past few weeks. The S&P500, however, has clearly broken above the consolidation of recent weeks. Further gains seem likely. The Nikkei also enjoyed seasonal bliss and is now within striking distance of the one-year high set in August this year. London also enjoyed strong gains and, like the Dow, is now at the top of its recent consolidation range. Copper was up on the week and set a new weekly high, while the Commodities Index was up and broke marginally above its two-month sideways consolidation. So, Santa distributed his goodies without fear or favour. Further gains seem likely, at least for a week or two. Hong Kong and Shanghai are now flashing amber warning signals a change from the red signals of a week prior.

    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)


    Last week I presented a rough mud map of how the next decade might pan out based on the experience of the past three decades in the American market. (Remember, past performance is no guarantee of future performance.) Next year is Year O of the Decade. We can expect a cyclical peak in the stock market some time in the first quarter of the year and a bubble top in an asset class. (Just what that might be is unknown. There are several possible candidates materials, gold, Shanghai real estate, bonds, etc.)

    To add to the dismal outlook for next year we are also facing the second year of the presidential four-year cycle. The first two years of the presidential cycle tend to underperform while the last two years tend to out perform. The first year of Obamas presidency didnt run true to form as it was outweighed by the final year of the Decade cycle (year 9) which tends to be good (a counter-cyclical rally after the falls in years 7-8). Next year, however, the stock market faces a double whammy Year 0 of the Decade and Year 2 of the Presidential Cycle. Things aint lookin good for 2010 if past performance is any guide.

    Add to that the fact that the stock market tends to underperform when the various arms of the federal government in America are all controlled by the same party (Administration/Presidency, Congress and Senate). Thats the situation now in America. So the American market is now facing a triple whammy in Year 0 of the decade.

    (The underperformance when all arms of government are controlled by the same party is accredited to the strength of intervention by government into economic matters. This creates uncertainty and change not good for the stock market. The stock market does best when political power is distributed making for slower or no actions by politicians as bills are stymied at one or other level of government as we saw recently in Australia with the ETS.)

    The above is a scenario for 2010. I believe all investors should set out scenarios based on their understandings of how the market might perform. One should not become wedded to such scenarios. If they dont work out so be it. Action on the part of investors should be guided by what IS and HAS BEEN happening in the market, not by what they think WILL happen. Action can then be initiated on the basis of whether or not the scenario is playing out.


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

    Chart Two 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.


    Chart Three Weekly XAO with Negative MACD.

    The Weekly MACD has crossed below its signal line. This is often a bearish sign. Both the RSI and Willimas %R are above their mid-lines and have kicked up. Two out of the three indicators are bullish. A fall by the RSI and Williams %R below 50 would be a medium term sell signal. That doesnt seem likely in the near future.

    Chart Four Daily XAO with MACD above Zero.

    This week, the Daily MACD broke above the Zero line and above its signal line. RSI and Williams %R are both above their midlines. RSI has broken above the 60 level which, in the past few months, has been a critical level demarcating up and down trends. A break above the current resistance level seems likely which means that a test of the bull rally high set in mid-October seems assured.

    Conclusion: The XAO remains in its sideways consolidation but the RSI is suggesting further upward movement. Given the seasonal bias to the upside, a test of the mid-October high seems likely.


    For many weeks, I had a heading Its All About The Dollar. Well, the dollar fell and our market didnt. So much for my thoughts. Maybe. I was also saying at the same time, in a quieter voice, if the American 10-Year Bonds move up, that will be good for our stock market. But my main focus was on the Ozzie Dollar, and I took my eye off the 10-Year Bonds.

    The market is never uni-directional, and it is the play thing of many different factors. Trying to understand those factors and their influence on the market is a highly complex affair. That is why, in the end, we must invest according to what we see in the market and not according to how we might explain what is happening in the market.

    Chart Five Australian Dollar

    The chief reason for watching the Ozzie Dollar is to understand some of the fundamentals which will affect our market, not necessarily as a timing device. If the Ozzie Dollar is increasing in value, it is attractive for overseas investors to invest in Australia (often with borrowed funds) as their investment naturally increases with the appreciation of our currency. Similarly, if the Ozzie is falling in value, it becomes less attractive for investors to invest in Australia as their investment naturally depreciates with the falling currency. This depreciation is magnified if borrowed funds are used. This has an effect on liquidity and volume of money available for investment in our stock market. Falling volumes are not conducive to a rising stock market. So in the long run, a falling currency has a detrimental effect on our stock market and is a major factor in the fundamentals pushing our market one way or the other. In the end, the fundamentals will play out, but we cant expect a one-to-one relationship.

    Chart Six Ten Year Bonds America

    The following chart is a long term (10-Year/Monthly) chart of the American 10-Year Bond Yield. You can see how it conforms to the Decade Trend. It tends to lead our market. It bottomed in the Dec.08 and then head north. The past month has been a big white candle suggesting that the next move by our market would be up.

    The paradox with bonds is that they contain within them their own demise and the demise of the stock market. Early on, a rising yield is good for the stock market, because people defer investing in bonds while the yield is rising (and price is inversely related to yield). Money must go somewhere usually into the stock market. Eventually, however, higher interest rates have an adverse effect on the economy and become increasingly enticing to investors, so they begin investing in bonds. Money flows into bonds and out of the stock market. The paradox is complete and the cycle begins all over again. But for the time being, bond yields are not enticing enough for investors, so money will continue to flow into the stock market and push it up.


    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. Most sectors had some improvement this week with two sectors now registering +100. Financials continued to improve significantly. Nothing in these figures suggests we are in a bear market (all defensive sectors are negative), thus confirming the long-term trend chart (above). Utilities and Health are both showing significant improvement


    Information Technology: (+100), 100
    Industrials: (+70), +100
    Materials: (+40), +50
    Financials: (+15), +50
    Consumer Discretionary: (+50), +40
    Telecommunications: (-50), -50
    Utilities: (-70), -55
    Health: (-80), -55
    Consumer Staples: (-40), -70
    Energy: (-90), -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. The past couple of weeks have seen some improvement but not enough to decisively break above the descending trend line from mid-October.

    Chart Seven RATIO XDJ:XSJ

    50 LEADERS

    Last week:
    No. of Stocks above 10-Day SMA: 30 (60%)
    No. Of Stocks above 50-Day SMA: 20 (40%).
    No. Of Stocks above 150-Day SMA: 36 (72%).

    This 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%).

    Chart Eight 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 overbought. That doesnt mean the market must fall now but the chances of a fall between now and the end of next week are high.


    The Advance/Decline Ratio had been weak since the end of October. That weakness now seems to be ending with higher lows and a spike up towards the high region. It is still a little early to be sure, but a new trend upwards seems to be underway.

    Chart Nine Advance/Decline Ratio


    Although the market remains in a sideways-to-down consolidation with no clear direction some strength is returning to the market suggesting an upward move. The Ratio Analysis and the Advance/Decline Ratio are both showing signs of an improving market. The Ozzie Dollar looks like moving up in a counter-trend rally. Although the 50 Leaders are overbought, the market may continue to show strength until the end of next week when this needs to be re-evaluated.

    Daily Indicators (MACD, Williams %R and RSI) also suggest the market is strengthening. The Weekly MACD has had a negative cross below its signal line but the Williams %R and RSI are both bullish.

    I think we can look forward to short-term strength and a test of the October high. A failure there may see further sideways to down movement. A break above the October high would be very bullish.

    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.

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

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