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The market failed its test

Lesley Beath  |  07 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


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.


The Australian market was, once again, one of the worst performers last week. The ASX 200 lost 2.2%, marginally less than the US market, where the S&P 500 declined by 2.3%.

The potential for a short-term bounce, as mentioned in the last report, did not unfold, with the Banks once again dragging on the market. That sector has now broken the gentle uptrend emanating from the July 2010 lows and as far as the individual components are concerned, there are no signs of improvement at this stage; further weakness is likely.

On the resources front, the ASX 100 Resources, the Materials, and the Energy sectors managed to hold above support last week, as did copper, oil, and precious metals. But despite a modest rise in the gold price, the Philadelphia Gold & Silver index was one of the worst performers (-2.5%). The Australian Gold index fared better, but it also posted a loss for the week (-1.5%). The good news is that neither of these broke below critical support.

As for the All Ords, it had exhibited some tentative signs of improvement over the past couple of weeks, but last Thursday's 2.2% decline has put it into a vulnerable position. Not only have price supports on a number of key stocks (the Banks, Macquarie Group (MQG), Westfield (WDC) and AMP (AMP) for example) been violated, but the weekly stochastic, as discussed in the last report, has pushed decisively below the "signal line". This was discussed last week and I noted the 34-week stochastic on the All Ords, the 20 Leaders, the Top 100 Resources, the Financials, the Banks, and Insurance, was testing the signal line. This made it a critical time for the Australian market. A rebound in that indicator would suggest that "for the time being, risk was shifting to the upside".

Well, the market failed its test, and despite the falls from April, risk remains skewed to the downside. I expect a number of stocks to make new correction lows in the short term.

It has been a very frustrating year for Australian investors. At the recent high in April 2011, the market had basically tracked sideways for 12 months. The April 2010 high marked the end of the first stage of the rally from the bear-market lows. But for a number of sectors, the correction began in 2009 and I believe that the mid-October 2010 high marked a peak of significance, and the beginning of the correction. The reasoning behind that view is that this was when the Financials, Consumer Discretionary, the Top 100 Industrials, and Property Trusts posted their peaks. This was a sign that the rally was running out of steam.