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Important juncture for the market

Lesley Beath  |  11 Oct 2011Text size  Decrease  Increase  |  

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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

 

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

Last week was a good one for global equities.

The week began with the US S&P500 testing its August lows. The US T-Bond /S&P500 ratio pushed above the August 2010 highs, tipping the odds in favour of continued downside in the US equity market. The break was only marginal and at the time I suggested "if the ratio reverses tonight we could get a short-term reprieve, but at this stage I don't think that it would be sustainable. Better to get the pain over and done with".

Well, the ratio did retreat on Tuesday and drifted lower for the rest of the week. And, on Tuesday the S&P broke below the August lows and then reversed sharply, posting strong gains. This recognition of support is encouraging, but at this stage the action is not enough to confirm that the worst is over.

However, looking beyond the US, there have been positive developments elsewhere.

As noted on several occasions over the past few weeks, Germany and Spain posted weekly 'key reversals' in mid September and despite the continued weakness in global equity markets, those key reversals were not violated. This is positive action and was followed this week by a weekly key reversal on the All Ords.

Elsewhere, the Japanese Nikkei is holding above good support, and action in Hong Kong is encouraging. Unfortunately action in the smaller Asian indices remains a concern.

And Brazil, Russia, India, and China show no clear signs of reversal at this stage.

We ask the old question once again - is the worst over?

I suggested last week that I did not think so, and that the US was on track to test its August 2010 lows at 1040. I admit that last week's action does cloud the issue, and as I had been looking for a reversal in Q4, this could well be it; but there is no clear evidence to suggest that that is the case. We need a little more conviction, but the situation appears to be slowly improving - although we could see continued volatility.

Let's take a look at a few more positive developments.

If we look at the US T-Bond monthly chart, which was presented back on the 28th September, we see that price is at the upper limits of a well-defined trend channel that has been in existence since 1986. A sell signal was generated two weeks ago and confirmed last week - I am of the belief that T-Bonds will find it difficult to push significantly higher. As money has been flowing into bonds as fear was increasing, the prospect of a pullback suggests that risk in the equity market could be abating.