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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

• Overview
  Australian resources have diverged from China. More...
• Ramsay Healthcare (RHC)
  On solid support. More...
• Rio Tinto (RIO)
  Prefer BHP. More...
• Fortescue Metals (FMG)
  Interesting. More...
• Commonwealth Bank (CBA)
  Risk is to the downside. More...
• AMP (AMP)
  No reason to be there. More...
• Seven West Media (SWM)
  Base completed. 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

The Australian market was left at the starting gates, yet again, last week. The All Ordinaries posted a marginal loss while the majority of global markets ended the week in the black. Our market is the "ugly duckling" on the world stage.

Unfortunately, there is not a lot of evidence to suggest that a turnaround is imminent. The All Ordinaries remains stuck in a range, with the Materials and the Banks a major drag on the index. The ASX 20 Leaders underperformed the broader market and the ASX 50 Leaders once again last week, and this trend can continue.

The chart of the 20 v 50 Leaders was highlighted two weeks ago as it threatened to break below the lower limits of a lengthy range. It broke to the downside the following week, completing a significant top.

If we look at the Small Ordinaries v the ASX 20 Leaders, there is resistance at current levels, so we could see a short-term reversal, but by and large, the balance of probabilities suggests the best opportunities continue to be outside the large caps.

As I said last week, "it's a hard slog out there".

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On the positive side, the Chinese market broke above its 2011 downtrend a few weeks ago and has been outperforming the US since the beginning of the year. It has been outperforming the World Morgan Stanley index for the past month. That "should" be good for the Australian market. Maybe in time!

But Australian resources have diverged from China. The ASX Materials Index followed the Shanghai market lower from April through to early January, and then advanced alongside it until early February. But then, as China gathered upward momentum and broke above the April downtrend, the Materials began to drift lower.

Even a rising US and Chinese market can't pull the domestic market out of the doldrums. We must wonder what our market will do in the event of a pullback in the US market. Will we follow it lower, or will China give some confidence?

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I know that I have spoken about the US market being due for a pullback for the past month or so, and it hasn't eventuated. But I don't think that this is the time for complacency. The S&P 500 is losing upward momentum as it tests the April 2011 highs, the VIX is hovering at long-term support, and although the US T-Bond/S&P 500 ratio broke below support, downside momentum is slowing.

And there is another concern - yes, we are climbing the "wall of worry", but we need to be on the lookout for signs that suggest the odds of a trend reversal are increasing.

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The latest worry is the action in the Dow Transports, and the resultant "non-confirmation" in Dow Theory. What is this non-confirmation?

You may have heard of Dow Theory, but here's a quick bit of background information. The Dow theory was derived from Wall Street Journal editorials written by Charles H. Dow, the fellow who founded The Wall Street Journal and invented the Dow Jones Industrial Average in 1896.