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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
  Gold – a short term extreme. More...
• Metcash (MTS)
  A bounce from long-term support. More...
• SP AusNet (SPN)
  Boring, but a good yield and minimal risk. More...
• Envestra (ENV)
  Constructive action. More...
• Telstra (TLS)
  A meaningful reversal. More...
• Tatts Group (TTS)
  TTS and Tabcorp have both bounced from support. More...
• Sirtex Medical (SRX)
  A sight for sore eyes. 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

In the last report I suggested that support levels would be less influential than emotions, and to get a gauge on when the capitulation phase was nearing an end we needed to focus on some of the indicators which would suggest that fear was subsiding; these included the VIX, US T-Bonds, and gold. And as always the T-Bond/S&P ratio.

So although the fear has subsided, and stockmarkets have bounced strongly, it is worth taking a look at the current position.

The VIX

The VIX hit a high of 48 last Monday, indicating that fear was at an extreme. It has since retreated but remains at an elevated position.

Let's take a look at the other instances (in the US) when the VIX reached such extreme levels.

• October 1997 (Asian crisis)
• September and October 1998 (Russian Financial crisis and Long Term Capital Management)
• September 2001 (September 11)
• July and August 2002 (break to new bear market lows)
• May 2010 (European debt crisis)
  
• The 48 level was exceeded in October and November 2008, when it spiked to 80-90.

To get a longer history, we can look at the 'old VIX' which is now the VXO. In October 1987, the VXO posted a high of 173 in October 1987; and it stayed there for the next 9 days.

The point of all of this is to highlight that last week's levels, unless there is to be a major crisis, mark a height of fear that is unlikely to be surpassed. This is not to say that we cannot get another bout of fear in another month or two, but for the time being there has been a reprieve, and it can persist in the short term. We can put this into context a little later.

US T-Bonds

The rally in recent times took the T-Bonds up to test the highs of last August. Price stalled at the end of the week, but as yet there are no major Sell signals in place. This does allow for some further strength, but there is resistance at current levels and betting on further upside carries risk.

Gold

Gold remains strong, although it did pullback slightly on Thursday and Friday. We are moving into a seasonally positive timeframe for gold, so this could help underpin the price. But seasonality will not protect downside if traders decide to pull out of the market. And given the fact that gold is now overextended and with the CME lifting margin requirements for trade in a wide range of gold products, there is scope for a near-term pullback.

This would not dent the longer-term bull market, which as I have been saying for years, is unlikely to end until gold reaches a parabolic blow-off phase. We are not there yet, but gold appears to be 'crowded trade' at the moment and just as sentiment in the equity markets reached an extreme last week, I think the sentiment in gold is also approaching a short-term extreme. A near-term pullback in gold could indicate a perception that risk in the equity markets is decreasing.

The US T-Bond/S&P500 ratio

The ratio increased again last week, but it remains below the levels seen last August. It appears that higher levels are possible over the medium term. This suggests that risk in the US equity market, over the next few months, remains to the downside.

(click image to enlarge)