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Expect continued lacklustre action
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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
Expect continued lacklustre action. More... - Westfield Group (WDC)
Remains constructive. More... - Amcor (AMC)
Unable to break above resistance. More... - Harvey Norman (HVN)
On critical support. More... - Spark Infrastructure (SKI)
A pullback. More... - Mesoblast (MSB)
Still risky. More... - Brambles (BXB)
Approaching resistance. 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.
At this time of the year, I often bring out the longer-term cycles which could give some guidance for the year ahead. But I am not going to do that this year, as I believe the main longer-term cycles which have been reliable in the past are not giving clear signals at this time.
I do find the Benner-Fibonacci cycle interesting, though. Briefly, this cycle reflects work done by Samuel Benner back in 1875, which was later adapted by AJ Frost (who combined Benner's work and Fibonacci cycles).
The basic idea is that (US) stockmarket peaks tend to follow a repeating eight-nine-10 yearly pattern, with troughs following a cycle of 16-18-20 years. The cycle has been extremely accurate in the past, calling in recent times for a low in 1995, a high in 2000, and a low in 2003.
It did not identify the 2007 peak, instead predicting a major top in 2010, followed by a significant low in 2011. Could last year's low be another significant turning point? It could be, but that doesn't necessarily mean we can push significantly higher, and it doesn't rule out the prospect of another decline to test the 2011 lows.
At this stage, I think we should just concentrate on navigating the short-term action in an attempt to identify a real trend if it is unfolding. The Australian market has been range-bound since August and until there is something to suggest an end to that behaviour we can expect continued lacklustre action.
It is frustrating to endure, and frustrating to write about. But it is what it is, and we can't make the market behave according to our wishes.
It is four months since the All Ords posted a climactic sell-off and an historical intra-day reversal on 9 August, and despite the false hopes and the fear that have dragged our emotions and the markets through the wringer, the All Ords now sits only marginally above the 9 August close. Not much change, but very hard on the emotions of investors.
We could be in for more of the same.
(click image to enlarge)
Going through the charts of the ASX 500 there is little to get excited about. Resistance levels are still in place on many of the major stocks and it is hard to identify many low-risk opportunities.
And speaking of resistance levels, at the end of last year the key resistance for BHP Billiton (BHP) and Commonwealth Bank of Australia (CBA) was highlighted, as were the key support levels. Neither stock moved beyond those levels over the past few weeks.
As noted on numerous occasions, the outlook for the broader market is likely to be muted until such time as the Materials and the Banks can move higher together – that is why these two stocks in particular are so closely monitored.
And what about the US?
Well, we did get the Santa Claus rally, which is encouraging. But the S&P remains below the resistance of the neckline of the Head and Shoulders top formation and the late October high. It has, however, pushed marginally above the 200DMA.
The S&P US Banks index has clearly broken its 2011 downtrend and appears relatively robust. This index topped out in February, ahead of the peak in the S&P 500, and also bottomed ahead of the S&P in August.
It appears to be headed higher and therefore is a positive for the broader US market. Interestingly, its chart pattern is a lot more encouraging than the Australian Banking sector.
(click image to enlarge)
(click image to enlarge)
The VIX
The VIX broke decisively through significant support on 20 December. This tipped the odds in favour of continued upside in the equity market. The index is now testing the late December low – a break below there would be another boost for US equities.
(click image to enlarge)
The bottom line for the US is that although resistance is in place, risk appears to be to the upside in the short term. It remains far more robust than the Australian market, which since April has been following in the footsteps of China.
The Chinese Shanghai "A" shares index peaked in August 2009 and has been trending lower since that time. It posted another significant peak in November 2010 and the decline from that peak to last week's low was 32 per cent. The bear market from August 2009 now stands at 38 per cent. The downtrend began to accelerate last April and 30 per cent of the decline has been since that peak. This compares to a 31 per cent decline in the ASX Materials between April and December.
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