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Risk has increased markedly

Lesley Beath  |  16 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 not have an interest in the securities disclosed in this report.


On the surface, the performance in the US equity market was relatively lacklustre last week but the price action tells a different story. A strong move to the upside on Tuesday sparked interest as it triggered some positive momentum and took the S&P 500 to test the 2015 downtrend.

But the index drifted lower as the week progressed and short-term momentum quickly turned negative. That confirmed a sell signal on the 34-week stochastic, following the one on the 13-week stochastic a few weeks ago.

The Dow Industrials is still holding above the 2015 downtrend, but only just. It needs to rebound quickly if it is to avoid posting a failed topside break.

The Dow Transport Index has broken back below both the 2015 downtrend and the 200DMA. Short-term support was violated last week.

I said last week that although there were sell signals in place on the momentum indicators, the price action was not giving any strong signals. I think that changed last week, and it changed for the worse.

I believe that downside risk has increased markedly.

If we look at the US S&P Bank Index, it tested the underside of its 200DMA in late April and has since drifted lower. A rally up to a declining 200DMA is common in a bear market, so the question now is whether anticipated weakness will take the index below its February low or whether that low will hold.

The charts of the major US bank stocks, presented later, show a similar rally up to the 200DMA, and then weakness. The charts give cause for concern.

I will let the charts of some of the other global equity markets speak for themselves rather than taking up too much time here. Overall, they suggest that caution is warranted.

In the Australian market, the All Ords popped above resistance on Wednesday but failed to hold the break. Wednesday's high at 5484 is now the barrier to overcome. The Materials Index was basically flat on the week, while the Financials Index was similar. Performance in the latter was affected by Australian and New Zealand Banking Group (ANZ) and Westpac (WBC) going ex-dividend through the week.

The sectors that have broken above resistance, and which have been highlighted in recent reports, remain robust. They include ASX REITS, ASX Healthcare, ASX Transports, ASX Retail and ASX Utilities. ASX Consumer Discretionary broke topside through the week. The ASX Midcap 50 has also broken above resistance, but the break remains marginal at this stage.