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Market in holding pattern

Lesley Beath  |  10 May 2016Text size  Decrease  Increase  |  

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. 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. The author does have an interest in the securities disclosed in this report.


The US equity market remains below the resistance that it had temporarily overcome a couple of weeks ago. My take on the situation is that we are in a "holding pattern". We just need to wait for some clues as to the direction of the next significant move.

And although there is a sell signal on the 13-week stochastic as mentioned last week--and the 34-week stochastic is on the verge of also generating a sell signal--the price action is not giving any strong signals. The Dow Transports and the Dow Industrials held short -term support last week. The UK FTSE did likewise.

The MSCI World Index has also retreated to short-term support. It is testing its 200DMA and the 2015 downtrend.

So we must simply wait for the market to show us its intention.

In Australia, the All Ords tested the resistance that we have been monitoring for the past few weeks. It was unable to break topside. Last week it was the resources that held the index back, the week before it was the banks. In just three trading sessions, BHP Billiton (BHP) wiped out all of the gains since mid-April. Rio Tinto (RIO) did the same.

The decline took both stocks back to test the 2015 downtrend. A pullback to the trend is a relatively common occurrence and is viewed as a confirmation of the breakout. But the severity and swiftness of the pullback is disconcerting. We would not want to see too much more price erosion as that would place both stocks back within their downtrends.

Given the position of the US dollar, and we will talk about that a bit later, I think the situation is tenuous at the moment.

On the positive side, the sectoral indices that have been discussed in the last couple of reports pushed above significant barriers. The topside break in the ASX REITS Index, which I highlighted in the last report, was followed last week by breakouts in ASX Healthcare, ASX Transports, ASX Retail, and ASX Utilities. The ASX Midcap 50 also broke above resistance, but the break is marginal at this stage.

Last week may have been a relatively flat one for the All Ords but there were some impressive performances in the individual stocks. The action is constructive and we really need to step back from the major indices to see some of the opportunities that are out there.

And speaking of opportunities, Blackmores (BKL) and Bellamy's (BAL) were two of the standout performers in 2015. I think it would be correct to say they were the envy of many investors. But all good things come to an end at some time and it did so for both as 2015 came to a close.

Blackmores declined by 34 per cent into late April. The retreat took price back to test the 200DMA. The test was successful and the stock has since pushed higher since. It's difficult to know at this stage whether the stock will now resume its upward path as there are no strong signals momentum wise. We can only keep an eye on it. But I think risk is to the upside.