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A prolonged correction cannot be dismissed

Lesley Beath  |  14 Jun 2011Text size  Decrease  Increase  |  

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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

 

Reviewed this week

A selection from the Small Industrials.

 

Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.


Overview

It was another poor week for global equity markets, with the S&P 500 posting its sixth consecutive weekly loss. The index is now in close proximity to its 200DMA, and at this stage a break below that support level is likely. Many global markets have already broken below this level, and the US is likely to follow suit.

The US proved extremely resilient until May but then joined its peers (many of which had been declining since late last year) and the downtrend has gathered pace over the past couple of weeks. This doesn't come as a surprise as I have been suggesting for some time that risk was increasing; and last week's action in the US T-Bond/S&P 500 ratio adds further stress to the situation. That is because the ratio has broken above the resistance of the mid-March high, completing a small reversal pattern. This, in my opinion, tips the odds in favour of a decline more akin to that of April-August last year. And although history rarely repeats in the exact fashion, a prolonged correction cannot be dismissed.

And if seasonal factors exert their influence we may have to wait until September or October for the next significant Buying opportunity.

In the short term, with support on the S&P 500 sitting just below current levels at 1233-1252, and with bearish sentiment, as recorded by the AAII (American Association of Individual Investors) at 47.7%, the highest level since late August 2010, there could be some short-term stability. But at this stage, I don't believe that the correction in the US has run its course. If there is a short-term bounce, it could be followed by weakness in another month or so.

In Australia, various indices are also on support.

This includes the ASX Top 100 Resources and the Materials. This support level has been discussed on several occasions, and incorporates the uptrend from the May 2010 low and the 200DMA. It has been marginally violated, but insufficiently so to complete a medium-term top formation.

The Financial index is also sitting on support; in this instance it is the lower limits of the range that has been in existence for the past twelve months. But whilst short-term downward momentum is abating, there are no concrete signs of improvement at this stage.