All quiet on the technical front
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Neither price action, sentiment gauges or momentum indicators are giving any clear signals at the moment, according to technical analyst Lesley Beath.
Recently a friend asked me what I thought about the US equity market. My first thought was, "It is quiet". That doesn't seem much of an answer, but in truth it does say a fair bit about what is happening.
It is trying to work out what that "quietness" means that is the difficult part. So what do I mean by "quiet"?
Obviously, to begin with, it is the price action. You will all be aware that the S&P 500 has spent the past three months trading uneventfully between support and resistance.
The Dow Transport Index continues to push against resistance but hasn't managed to pop topside. And yet those tests of resistance haven't been met with any major pullbacks.
The Nasdaq finally made it back to its 1999 level in August and September but it has since done very little. Sentiment indicators are also reflecting this somewhat passive environment.
The VIX has edged up after sitting at the lower limits of a three-year range: but there is still a high degree of complacency.
The VIX is also known as the "fear index" and when it is at low levels it is assumed to mean that greed is the prevailing sentiment.
But if we combine the reading on the VIX with the CNN Fear and Greed Index and the AAII Sentiment survey, the low levels of the VIX, in my opinion, tend to reflect complacency rather than greed.
The CNN Fear and Greed Index has dropped from an Extreme Greed reading in late July to a "Fear" (albeit modest fear) reading last week.
That Extreme Greed reading, which was the highest since mid-2014, had little negative impact on the market. So you could argue the index has little predictive value.
I must admit that can be the case, and often is, but the main reason we watch all these indicators is to get a "feel" for what is going on.
No indicator is infallible and at times there will be an apparent conflict in what is being broadcast, but you just need to keep on top of what is going on.
What is interesting in the Fear and Greed Index is that one of the components of the index--the junk bond demand--is reflecting an extreme greed situation. I continue to believe that bonds are far riskier than equities.
The latest reading in the AAII Sentiment Survey shows bullish sentiment at 25.2 per cent. That puts optimism below its historical average of 38.5 per cent for the 49th consecutive week and the 82nd out of the past 84 weeks.
Neutral sentiment was 40.8 per cent. It remains above its historical average of 31.0 per cent for the 37th consecutive week.
Bearish sentiment rose 5.8 percentage points to 33.7 per cent. Bearish sentiment has stayed above its historical average since the end of August, but it is not extreme.
So here again, there are no strong signals. I think the most interesting thing from this survey is the high level of so-called neutral readings.
So the situation is a bit "all over the place".
Neither price action, sentiment gauges or momentum indicators are giving any clear signals. They are all "quiet".
It reminds me a bit of when all the children are out of sight but quiet. The peace is welcome, but you are always concerned they are up to no good. Parents and grandparents will know the feeling!
China is also--sorry to use that word again--quiet. There hasn't been much happening for months now, although that doesn't seem as disconcerting as the US.
Elsewhere, the UK FTSE is at major resistance, as is the Japanese Nikkei.
The FTSE is in the vicinity of its 2015 high. If you remember, that high overtook the December 1999 all-time high, but the break was short-lived. The FTSE then declined by 23 per cent over the following ten months.
As for the Nikkei, it is testing the June 2015 downtrend. So both are facing significant barriers.
The Australian market plods along. It too remains above support and below resistance.
The action in the major indices masks some notable performances in individual stocks. As regular readers will know, an increasing number of stocks have pulled back to their 200DMAs over the past few months.
They have been listed in previous reports. We can add a few more to that list this week: Dexus Property Group (ASX: DXS), REA Group (ASX: REA), James Hardie Industries (ASX: JHX), Spark New Zealand (ASX: SPK), Duet Group (ASX: DUE) and Spark Infrastructure Group (ASX: SKI).
Let's keep an eye on these for signs of improvement.
As far as the resources are concerned, I think the situation warrants some caution. BHP Billiton (ASX: BHP) broke above resistance a few weeks ago, but Rio Tinto (ASX: RIO) and Brazil's Vale have yet to do so. BHP is overbought and chasing the stock at these levels carries risk.
In the short term some of the oversold industrials appear less risky.
In the energy sector, the ASX Energy Index and some of the major components--Woodside (ASX: WPL), Caltex (ASX: CTX), Oil Search (ASX: OSH) and Santos (ASX: STO) were unable to crack the resistance that I highlighted in the last report.
The oil price and the US Oil & Gas index are also still below key resistance.
Base metal prices exhibit downside, rather than upside, risk.
Gold has stabilised in the vicinity of its 200DMA, but the price structure calls for continued downside.
If we piece together all of the above, you would have to conclude that as far as global equity markets are concerned there is a degree of short-term risk--but it is not extreme at this stage.
As we have discussed recently, the prospect of a higher US dollar, which has been indicated for the past couple of months, will dampen any upside potential in commodity prices.
And while the US Dollar Index is dominated by the US dollar/euro rate, the US dollar is gaining against most currencies.
The Australian dollar is holding up very well considering the improvement in the US dollar. It remains above both its 200DMA and the uptrend from the January 2016 low.
Against other major currencies our dollar is doing very well. And against the British Pound? Time to travel to the UK!
There's not a lot more to say this week--so I'll just sign off and be "quiet".
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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. 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 author does have an interest in the securities disclosed in this report.
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