XJO 0.20% 6,730.8 s&p/asx 200

snippets from my weekly stock market report

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    General Observations

    Best quotes of the week:

    Oh, was there an election? Who won? (American Stock
    Market)

    Someone left the cake out in the rain … (Australian
    Government).

    Ok. I made that up. But it seems apt.

    The Baltic Dry Index continued to slip. (Nothing new there.) Down now to almost 800 after being above 11600 in June 08.

    The American WLI (Weekly Leading Index) continued to fall. The good news is: the fall might be slowing.

    (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 information is up to 24 October 2008).

    In Australia, the market had been enjoying its best rally for months – new intra-day highs for six consecutive days; but it petered out on Thursday and Friday. A chart of the XAO since June 07 shows a down-sloping channel that the Index has been in. It has now fallen below that channel and may be starting a new steeper decline if it can’t claw back within the confines of the previous channel in the next week or so. If it can rise back into the channel, then the chances of a test of the 150-Day Simple Moving Average are high. Given seasonal influences, I think this is the more likely possibility.

    The Australian market was up marginally on the week (XAO up 24 points). The worst performing sectors in the Australian market were the Property Trusts (-5.5%) and Information Technology (-5.1%). The best performing sectors were Utilities (+6%) and Industrials (+5.1%) (Note: The Industrials Sector is not the “industrials” usually referred to by commentators. The companies from the 50 Leaders included in the Industrials Sector are: Leighton’s, Macquarie Airports, Macquarie Infrastructure, Qantas, Transurban and Toll Holdings. The sector is heavily weighted to the transportation/infrastructure stocks).

    The Indicators

    The All Ordinaries Index (XAO):

    • The daily MACD is positive.
    • The weekly MACD is negative (this is the “master signal). The MACD histogram has turned up. A big positive.
    • The weekly Slow Stochastic is 18.68. Although this is below the 20 level, the weekly Slow Stochastic has crossed above its signal line and is moving up. A cross above the 20 level would be a signal for active investors to add to holdings.
    • The daily Slow Stochastic is at 57.63, below the oversold level and heading down. This suggests that this retracement has further room to move down.
    • Weekly RSI is at 27.45. This is still in the oversold range below 30. It needs to rise above 30.
    • Daily RSI is at 43.51 – a positive divergence has formed on this indicator. The daily RSI is still now above its trend line from early September. This is a big positive. It needs to rise above 50 for market participants to have confidence that a sustainable rally has begun.

    The rally late last week 27-31 Oct.) and early in the current week (3-7 Nov.) was strong and gives the possibility of a sustainable rally of some weeks’ duration. Further upward movement is likely to produce an inverse head and shoulders formation which should be the basis for the sustainable rally. But – don’t pre-empt the market. Let’s see how that works out.

    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 had its first improvement in five weeks, now up to 14 Stocks (28.6%). (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 six to eleven (22.4%). These were: AGK (AGL Energy), AMC (Amcor), ASX (Austrn. Stock Exchange), BXB (Brambles), CSL, FGL (Fosters), IAG (Insurance Australia), QBE Insurance, TCL (Transurban), TOL (Toll Holdings) and WOW (Woolworths).

    The number of stocks with a positive daily MACD reached 43 (87.8%). This is in the short-term over-bought category. So we may see a little more softness before we get another move up.

    This week we have thirteen stocks above the 50-day Simple Moving Average (26.5%). This indicator is now sitting above the oversold level (10).

    Thirteen stocks are above both the 50-Day and 10-Day Simple Moving Average.

    This week ten stocks (20.4%) are positive on all four indicators (Daily and Weekly MACD, 50-Day and 10-Day Moving Averages). These were:

    AGK (AGL Energy), AMC (Amcor), ASX (Austrn. Stock Exchange), BXB (Brambles), FGL (Fosters), IAG (Insurance Australia), QBE Insurance, TCL (Transurban), TOL (Toll Holdings) and WOW (Woolworths)

    Only three stocks (6.1%) were negative on all four indicators:

    MAP (Macquarie Airports), MIG (Macquarie Infrastructure), and Newscorp

    This is a major change in these indicators with the positives now greater than the negatives.

    Conclusions

    Further improvement in the internal strength of the market has occurred this week although the change in the XAO itself was minimal. The market may be on the verge of a sustainable rally.

    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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