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Improved global indices cannot be ignored

Lesley Beath  |  20 Sep 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

 

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

A lot happened last week - let's just get to it.

In the last report I noted that we need to be constantly on the lookout for evidence that our views may be incorrect. There was a lot of Technical action to suggest that the Australian market could re-test its August lows, but there were a few things that were giving some mixed signals; the Dow Industrials did not push below the early August lows when the Dow Transports did so on August 22; there was a Buy signal on the US market; and the chart formation on the US Banking index was showing some signs of improvement.

In addition, the US market had sold off early on Monday (the 12th), breaking below the lows of the previous week, but managed to close well above the lows of the day. And the US T-Bond/S&P ratio hit the resistance of its mid-August high on an intra-day basis, but was unable to break topside. This suggested that the market, in the very short term, had been given a reprieve.

Well that reversal on Monday in the US was followed by other improvements in various markets as the week wore on.

Let's take a look at some of the highlights.

The MSCI held above the support that was discussed last week, posting a 3% gain for the week.

The UK FTSE held above the July 2010 lows.

The German DAX posted a weekly 'key reversal', as did Spain's Madrid General Index.

Italy and Portugal violated their 2009 lows during the week, but managed to reverse, closing back above them.

Hong Kong posted a strong reversal after marginally violating its May 2010 lows.

US T-Bonds tested the highs of 2009 and retreated. There is no confirmed Sell signal at this stage but upside momentum is abating and as peaks in Bonds have been associated with lows in the equity market, this is a viewed as a positive development. They bounced again last night (Monday) but have not yet broken topside.

In Australia, the Banks tested and held above their August 2011 lows. And the Materials index tested and held above the August 8th closing low; this alleviated risk of a push to the August 9th intra-day low of 11082.

These are all positive developments. And although the action in the US market still suggests that there is a real risk of another sell-off, these improvements across a number of global indices cannot be ignored.

Let's take a closer look at the US market. As regular readers will be aware, I have been suggesting for some time that the S&P500 could move back to the 1250 level before the next bout of selling unfolded. The index hit 1231 at the end of August and I noted at the time that risk had moved to the downside again. We got a short sell-off soon after but price then bounced from the support of the trendline emanating from the August lows.