XJO 0.55% 5,927.6 s&p/asx 200

snippets from my weekly stock market report

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    General Observations

    October has lived up to its reputation for crashes, reversals and the ending of bear markets. Well – maybe I’m getting a little ahead of the facts. October this year certainly had a crash, a reversal . . . the end of the bear market? Maybe. The jury is still out on that one. In America, October 2008 was the worst month since the Crash of 1987. The last week of October 2008 was the biggest weekly gain since 1974, up 10% on the SP500. The total loss for October on the SP500 was 17%.

    The Baltic Dry Index continued to slip. It is now back to levels not seen since 2002 during the last American recession.

    The American WLI (Weekly Leading Index) over the last six weeks of data has plummeted. The WLI is a good predictor of the direction of the American economy. Given the size of the American economy, it has an enormous influence on the world economy. (The WLI is a composite index developed from data on M2 Money Supply, industrial materials price index, initial unemployment insurance claims, mortgage applications, S&P 500, 10-yr Treasury bond yield, and bond quality spread.) There is some lag in the collection of data for this Index so the current graph is up to 17 October 2008.

    In Australia, the total fall for the All Ordinaries Index (XAO) for the month of October was 20.4%, eclipsing the fall on the American SP500. In the last week of October, the XAO rose 3.94%. In October, from high to low, the American market fell 27% while the Australian market fell just over 24%.

    The worst performing sectors in the Australian market were the Industrials and the Financials-x-Property Trusts. These were both marginally negative on the week. (Note: The Industrials Index is not the “industrials” usually referred to by commentators. The companies from the 50 Leaders included in the Industrials Index are: Leighton’s, Macquarie Airports, Macquarie Infrastructure, Qantas, Transurban and Toll Holdings). The best performers were the Gold Index (up 19.3%) and the Metals and Miners (up 14.7%). So, it appears we have the old switcheroo going on again. Out of Industrials (broadly defined) and into Resources.

    Next week is the American election. What does history tell us to expect?
    o The first two years after a presidential election tend to be the weakest in the four-year presidential cycle. (Unpopular policies tend to be implemented in the first two years of the cycle. More popular policies are implemented in the last two years of the cycle. “Pork Barrelling” to ensure re-election.)
    o If the new president comes from a different party from the outgoing president, the market tends to be weaker than if the new president comes from the same party. If the incoming president is elected on a “change” campaign, the market tends to be weaker than if the new president campaigns on a conservative platform. (“Change” means “uncertainty”, and the market hates uncertainty.)
    o If the new president has both chambers of the Congress from the same party as himself, the market tends to be weaker than if Congress is split between the two parties. (A solid party bloc in the House, the Senate and the Executive means that change is rammed through. A split between the Executive and the Congress usually means that consensus politics dominates.)

    Obama seems to have a stranglehold on this election. As far as the market is concerned, the prospects look grim.
    o The next two years would tend to be weaker no matter who wins. Strike One against the Market.
    o Obama is a Democrat, while Bush is a Republican. Change of party. Strike Two against the Market.
    o Obama is campaigning on a “change” platform. “Change” is the dominant theme of his campaign. Strike Three against the market.
    o Both chambers of the House are likely to be Democrat, the same party as Obama. Strike Four against the market.

    The next two years, based on history, look grim for the market if Obama wins. We can expect euphoria to engulf the market initially, but then grim reality will take hold. The chances of a new bull market don’t look good.

    Of course, that all depends on Obama winning. The odds of McCain winning are, at this stage, slight. But, even if he wins, two out of four are strikes. Still not good for the market.

    (Note. This is absolutely non-party political. It has nothing to do with Obama being a Democrat per se or McCain being a Republican. It is based purely on what happens in the two years after any presidential election.)

    The Indicators

    The All Ordinaries Index (XAO):

    • The daily MACD is positive. (The first time since late September.)
    • The weekly MACD is negative (this is the “master signal). The MACD histogram has turned up. A big positive.
    • The weekly Slow Stochastic is 8.58, well below the oversold line.
    • The daily Slow Stochastic is at 71.85, below the oversold level and heading up. This suggests that this rally has further room to move up.
    • Weekly RSI is at 26.56. This is still in the oversold range below 30. It needs to rise above 30.
    • Daily RSI is at 41.67 – a positive divergence has formed on this indicator. The daily RSI is still below its trend line from early September. It needs to rise above there for market participants to have confidence that the current rally can last for some time yet.

    Last week I said: “Most of these readings are so bad, it is difficult to imagine how they could become worse.” Well, they didn’t become worse. There has been some improvement, but not enough to give conservative investors confidence to enter the market.

    50 Leaders

    In the past week, most indicators of the internal strength of the 50 Leaders have shown improvement.

    The number of stocks positive on the weekly MACD continued to slide this week, now down to 11 Stocks (22.4%). (The weekly MACD is a lagging indicator and takes some time to respond to stock price movements.) Stocks positive on both the weekly and daily MACD improved from four to six (12.2%) These were AMC (Amcor), BXB (Brambles), FGL (Fosters), NAB (National Australia Bank), TCL (Transurban) and WOW (Woolworths).

    This week we have ten stocks above the 50-day Simple Moving Average (20.4%). This is up from one stock two weeks ago and this indicator is now sitting at the oversold level (10).

    Six stocks are above both the 50-Day and 10-Day Simple Moving Average. Two weeks ago, no stocks were positive on this indicator.

    This week six stocks are positive on all four indicators (Daily and Weekly MACD, 50-Day and 10-Day Moving Averages). These were: AMC (Amcor), BXB (Brambles), FGL (Fosters), NAB (National Australia Bank), TCL (Transurban) and WOW (Woolworths)

    Nineteen stocks (38.8%) were negative on all four indicators:
    AMP, AXA, FXJ (Fairfax), GMG (Goodman Group), GPT (General Property) LEI (Leighton’s), LLC (Lend Lease), MAP (Macquarie Airports), MIG (Macquarie Infrastructure), MQG (Macquarie Bank), OZL (Oz Minerals), QAN (Qantas), SGB (St George Bank), SUN (Suncorp Metway), TAH (Tabcorp), TEL (Telecom New Zealand), WBC (Westpac), WOR (Worley Parsons).

    The gap between the positives and negatives is still too far apart. We need to see a crossover of the red and blue lines to indicate the possibility of a medium term trend change.

    Conclusions

    The past week has been a good one generally for the Australian market. Some improvement in the internal strength of the market has occurred. The market may be on the verge of a sustainable rally.

    The American market is on the verge of a trend change. It looks like we are waiting for the euphoria of a major political change in America to occur to provide the catalyst for a reversal in market fortunes. But, no matter who wins the American election, the long-term future for the market looks pessimistic.

    Perhaps this market has been so oversold, no particular catalyst is needed. The XAO with a P/E well below 10 must be ripe for cherry picking by value investors.

    At the moment, conservative investors should still be out of this market. No long-term position should be taken until indications are clear that a new uptrend is in place.

    There are enough positive indicators for active investors to consider entering the market. But be prepared to exit at the sign of a trend reversal. This is still a bear market.

    Anything can happen on the stock market. Continue to watch price action, trend lines and the indicators, particularly the weekly MACD. If a sustainable uptrend does ensue, there will be plenty of time to get on board. Don’t get obsessed about catching a bottom.

    Cheers
    Red







 
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