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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

High risk and low risk

• Overview
  Australian market on support, but the US remains risky. More...
• Incitec Pivot (IPL)
  Sell signals in place. More...
• Australian Agricultural (AAC)
  Risk is to the downside in the short term. More...
• Graincorp (GNC)
  High risk environment. More...
• Emeco (EHL)
  Take profits. More...
• CSL (CSL)
  At support. More...
• Westpac Bank (WBC)
  A trading rally. More...

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

Global stockmarkets came under further selling pressure last week and the Australian equity market was one of the worst performers, with the All Ords falling by 4.5%.

This fall in the domestic market came on the back of significant falls in the resource sector; the ASX 200 Materials index and the ASX 200 Resources declined by 7% and 6.5% respectively. The Small Resources closed 8.5% lower. This sector of the market has been a concern for some time and further falls are indicated.

(click image to enlarge)

The decline last week has taken the All Ords back to its 200DMA, and although this level was discussed a few weeks ago as potential downside risk, there is little evidence to suggest that we are at the beginning of a sustainable advance.

There is scope for a short-term bounce from the 4686-4638 zone as a large number of individual stocks probe significant support levels, but as the US market remains in high-risk territory, it has the potential to add further stress to global markets.

At this stage the S&P500 has not broken any key support levels and so there is a chance that it could surprise to the upside, but that is the least likely scenario. The support levels that will attract the most interest are 1294 on the S&P 500 and 11983 on the Dow Industrials. These were violated last Thursday, but strength on Friday pushed both market indices above those levels. As these levels are close to the 'round number' 1300 and 12000, they also take on psychological significance.

As discussed in recent reports, action in the VIX and the US T-Bond/S&P500 ratio will be instructive and a break above resistance will be further evidence that a peak of significance in the US equity market has been registered.

The chart of the US T-Bond/S&P500 ratio was highlighted in the last report. The ratio had been trending lower since September but was beginning to show signs of reversal. I suggested that a break above 0.0930 would indicate that risk was increasing even further. The ratio hit that level on Thursday but retreated on Friday leaving this resistance intact. This came in conjunction with the VIX failing to overcome the important 23.8 level.