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Another good week for global markets

Lesley Beath  |  29 Jan 2013Text 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.

 

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

Last week was another good one for global equity markets. In the US, the Dow Transports posted a record high. This index, which is often viewed as a bellwether for the US economy, has risen dramatically since it broke above resistance in mid-December.

The Dow Industrials, which was trading at resistance at the time of the last report, pushed above that barrier on Tuesday.

Bullish sentiment, as measured by the AAII Sentiment Survey, rose to 52.3 per cent, compared to the historical average of 39 per cent. The last time there was a similar reading was in January 2011.

This bullish sentiment is unusually high, but not excessive enough at this stage to be a major concern. Bearish sentiment is at its lowest level in about a year. At this stage, the high bullish reading is noted, but if it pushed too much higher, I would begin to get worried.

However, it should be remembered that sentiment levels are not necessarily a leading indicator, and at some peaks in the market, sentiment readings give no clues whatsoever.

What is interesting at the moment is the US T-Bond/S&P 500 ratio. We looked at this last week, noting the key support level that was in close proximity. A break of that support would have been an indication the US equity market had the ability to push significantly higher in the short term.

Well, that support was broken on Friday but I don't think the break is definitive at this stage, and would like to see further follow-through this week. If that occurs, in conjunction with continued weakness in the VIX, then we could see some pretty strong moves in the equity market.

I know I have been saying this in recent reports, but it is worth repeating. At this stage, there are no signs of deterioration in the structure of the US equity market. The only negative is the high level of bullishness and the fact the Nasdaq is not following the broader market to new highs - courtesy of Apple.

The Australian market gained in each trading session last week, ending the week with a 1.3 per cent advance. Banks led the way with a 2.6 per cent rise. This took the ASX Banking index up to test its April 2010 high.

A break above there would, as suggested a couple of weeks ago, likely see the All Ords trade towards the upper limits of the range that has contained it for the past few years.

What are the odds of such a break in the Banks index? Well, Commonwealth Bank of Australia (CBA) has already broken to new all-time highs, so it faces no significant barriers. But the other three majors, National Australia Bank (NAB) and Australian and New Zealand Banking Group (ANZ) in particular, still have hefty barriers at slightly higher levels.