XJO 0.12% 7,377.2 s&p/asx 200

the redback report - week ended 18/12/09

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    This week the market was up modestly, XAO +0.44%. Seasonality played out true to form this week, with the XAO down four days and then up on Friday. Only two S&P Industry Sectors were down this week, Telecommunications (-0.51%) and Financials (-0.42%). Telecommunications, one of the best performers in recent weeks, was once again having a stellar week, until 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 (+3.7%) and Energy (+2.4%). Its a long time since Energy figured amongst the best performers.

    Best Three Sectors:

    Information Technology: +3.7%
    Energy: +2.4%
    Health: +2.37%

    Worst Three:

    Materials: +0.09%
    Financials: -0.42%
    Telecommunications: -0.51%

    Among the sub-sectors: Property Trusts were up, +0.75%; Metals and Mining were down -0.08%; and Small Ordinaries, -0.18%. The 50 Leaders was up at +0.2% and performed better than the Small Ordinaries. Risk Aversion/Risk Inclination was weighted to Risk Aversion. Gold Mining continued its correction -2.25%.

    Internationally, Shanghai was down and close to completing a double top. Hong Kong was down and sitting on the neckline of a Head-and-Shoulders top. The Dow was down, but still within its sideways consolidation of the past few weeks. The Nikkei was up marginally continuing its consolidation after one of its best weeks for a long time two weeks ago. It remains above the 200-Day EMA and the 10,000 level. London was down marginally on the week but remains in a sideways consolidation. Copper was flat, while the Commodities Index was up but still within a two-month sideways consolidation. Another tepid week but - Hong Kong and Shanghai are flashing big red warning signals.

    Chart One Weekly % Change Indices


    The following is 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.

    Decade Trend
    Year 0 - Cyclical Peak, Bubble Top (1980, 1990, 2000)
    Years 1/2 - Post Bubble Trauma
    Years 2-4 - Consolidation and Recovery
    Years 5-7 - Speculative Rise and Peak (mid-late 07)
    Late 7-8 Collapse into Crisis. Central banks respond by slashing interest rates and opening the monetary flood gates
    Year 9 - Cyclical growth
    Year 0 - Cyclical Peak, Bubble top (2010?)
    Begin again and repeat.

    To illustrate, heres a monthly chart for Nasdaq 100 (NDX) for the past 10 years:

    Illustration One 10 Year Chart NDX

    And the Dow Jones Industrial Average:

    Illustration Two 10 Year Chart Dow Jones Industrial Average

    The cyclical pattern is particularly clear if you look at the Relative Strength Indicator in the pane under each of the Index charts.

    According to McCulley and Fuerbringer (Your Financial Edge, 2007) the stock markets of all developed countries (and Australia is mentioned particularly) have become highly correlated with the American market since the late 1990s. So, if America follows the usual pattern in the coming decade, we can expect Australia to do something similar

    This might suggest that long-term investors could adopt a policy of five years in the market and five years out of the market buying at the end of Year Two and selling out near the end of Year Seven.

    This year, 2009, is following the usual pattern with cyclical growth. I suspect that the cyclical peak, which which the mud map suggests in the first quarter of 2010, may be pulling forward to the end/beginning of 2009/2010. (See further comments on this in the section on the Ozzie Dollar.) This means our market may be heading south sooner than expected


    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. RSI is still above its mid-line but the Williams %R has now fallen below its mid-line. Two out of the three indicators are bearish. A fall by the RSI below 50 would be a medium term sell signal.

    Chart Four Daily XAO with MACD below Zero.

    This week, the Daily MACD remains below the Zero line and below its signal line, but is basically in a sideways, non-trending movement. RSI and Williams %R are both below their midlines.

    Horizontal Support and Resistance lines and a 20-Day Channel are shown. A break below 4857.5 and a new 20-Day Low would be bearish. A break above 4806.1 and a new 20-Day High would be bullish.

    Conclusion: The XAO is in a counter-trend sideways to downward movement. This could break either way, up or down. Patience is required to see which way the market moves decisively.

    I show the following two charts on a regular basis. Both lead our market up earlier in the year and both topped out in June/July. Neither has been able to breach those tops since.

    Chart Five Ten Year Bonds America

    The 10-Year Bond Yield had a good run for about 2 weeks but the run seems to have petered out around the 36 (3.6% yield) level. This area has offered strong resistance in the past. It now appears to be in a medium term sideways consolidation below the June high.

    Chart Six Shanghai

    Shanghai is close to completing a double top. A break through the bottom of the middle trough at 3080.9 would be very bearish. The RSI has now broken decisively below the 50 level a bearish signal. A break below 2639.8 would put Shanghai into a primary down trend.


    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. No sector scored +100. The domestic sectors (Consumer Discretionary, Industrials and Financials) weakened. Materials has continued to rise up the rankings and is now registering positively. Nothing in these figures suggests we are in a bear market (all defensive sectors are negative), thus confirming the long-term trend chart (above).


    Information Technology: (+50), 100
    Industrials: (+50), +70
    Consumer Discretionary: (+60), +50
    Materials: (+40), +40
    Financials: (+45), +15
    Consumer Staples: (-60), -40
    Telecommunications: (-40), -50
    Utilities: (-95), -70
    Health: (-100), -80
    Energy: (-100), -90

    Information Technology had a big jump this week to top the ratings. It is, however, inconsequential in the bigger scale of the market. The upward trend in the Defensives continues. They are still in no danger of indicating a bear market (in the positive sector) but the trend is significant. Apart from IT no industry group is rating above +70. Last week, I thought the fall in the Financials was over, but they have continued to weaken this week.

    For the market to return to a bullish stance, Consumer Discretionary (XDJ) needs to decisively outperform the Consumer Staples (XSJ) on a ratio basis. This ratio is currently in a descending triangle.

    Chart Seven RATIO XDJ:XSJ

    The Australian Dollar has broken decisively to the down-side of a Head-and-Shoulders top pattern. A measured move down suggests the Dollar will drop down to 0.86 where there is also a key support area. We must now presume that the up-trend in the Ozzie has broken to the down-side. While the Ozzie remained in an uptrend, foreign investors were willing to invest in Australia. With the Ozzie now trending down, this flow of money will probably be reversed putting a strain on liquidity and our stock market. This is a decidedly bearish event. It still has to translate into a bearish drop on our market, but given the positive correlation between the stock market and the AUD since March, it seems only a matter of time before bearish forces dominate. It is normal for a chart to test a neckline break as resistance before resuming the march south. Expect some backing and filling before the down-trend re-asserts itself. A failure of the neckline to act as resistance and a break north of the neckline would be bullish.

    Chart Eight AUD/US$

    50 LEADERS

    Last week:
    No. of Stocks above 10-Day SMA: 21 (42%)
    No. Of Stocks above 50-Day SMA: 16 (32%).
    No. Of Stocks above 150-Day SMA: 37 (74%).

    This 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%).

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

    The light orange circle at the top right of the chart shows the area I would have expected the Above 10-Day Percent (blue line) to have peaked. The cyclic forces in the next week look like they will be down rather than up. The Above 50-Day Percent (red line) has been showing weakness since mid-October. The Above 150-Day Percent (yellow line) is slowly losing momentum. This weakness in the internal structure of the market suggests that the next major move will be down rather than up. However - the week before Christmas tends to have a bullish bias, so my pessimism may be misplaced. We shall see.


    The Advance/Decline Ratio has been weak since the end of October with no spikes up into the high area, while it has been spiking down into the Extreme Low area. Now, it is finding difficulty rising above the mid-range middle line. That contrasts with events during the July/October Rally.

    Chart Ten Advance/Decline Ratio


    The theme of this weeks report is, I think, quite clear. The market remains in a sideways-to-down consolidation with no clear direction, but the storm clouds are gathering. If the market drops below 4515 long term investors might, perhaps, consider lightening their position with the idea of exiting completely if the 13-Day SMA breaks below the 150-Day SMA.

    The internal strength of the market as represented by the Ratio Analysis, 50 Leaders and the Advance/Decline Ratio suggests that the market is weakening. Daily Indicators (MACD, Williams %R and RSI) also suggest the market is weakening. The Weekly MACD has had a negative cross below its signal line and the Williams %R is below its mid-line.

    Most telling is the change in trend in the Australian Dollar. A successful test of the neckline of the head-and-shoulders pattern and a continued move down would be very negative.

    The Hong Kong and Shanghai markets are on the verge of major break-downs. That hasnt happened yet, and may not happen. But those two markets, given their importance for Australia, deserve close watching.

    The Very Long Term Decade Analysis suggests that a big move down is coming in the near future. Given the time-scales involved that could be as late as the end of April 2010 or it could be imminent. It is not a great timing device but a mud map to help in understanding context.

    The market remains in an undecided state until we get a clear direction up or down, it is best to stand aside and wait. The longer we have to wait, the bigger the move. Hopefully, that will be up. But I dont put any faith in hope, so well continue to wait until the market gives us a clear direction.

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

    Finally, let me take this opportunity to wish you the best for Christmas and the New Year.

    I'm looking forward to a few days where I don't have to continue the grind of continually updating my data and wondering what the stock market might be doing - and enjoying my family and a wonderful bottle of wine or two.

    My daughter and two grand-daughters came home from their visit to Uncle Reagan's in Switzerland last week.

    It was wonderful to see them, although my daughter is not too well.

    The two kids look fabulous. Ruby is cuter than ever (if that is possible) and little Poppy is starting to spin around on the floor and push herself backwards. Just that stage which precedes crawling - and then the fun will start. LOL.

    I reckon life's not too bad when you can see little ones like those two developing and growing.

    I hope your life is just as rewarding.

    I must also thank especially all those people who have given me so much positive feedback and many thumbs-up over the past few months.

    And a special word of thanks to Rob7 - his unstinting generosity inside and outside Hot Copper is a model for all of us.


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