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Not a low-risk entry level

Lesley Beath  |  12 Feb 2013Text 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.


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.


The US market edged higher again last week and Australian equities gained almost 1 per cent. Healthcare was the standout sector, advancing 5 per cent. This came despite a sell-off in Cochlear (COH). The Banking index held its break above resistance, as did the ASX Financials.

The key indices, the All Ords and the ASX 200, sit just below the upper limits of the range that has been in place for the past few years. There are a number of global equity markets testing or approaching key resistance levels, and as I noted last week, I think "a healthy dose of scepticism" is in order.

True, the US market is showing no real signs of weakness at this stage, and neither is Australia. But there are cracks appearing in some global markets.

Japan, which has risen strongly since mid-November, tested the April 2010 highs last week, but was unable to break topside. The resistance on the Nikkei coincides with the resistance on the currency (US dollar/yen), so this will be a real pressure point for both.

The Nikkei is looking "toppy" at these levels and momentum is showing a marked deterioration - a topside break appears unlikely.

In Hong Kong, the Hang Seng index sits marginally below its main barrier, but a weekly "key reversal" last week is a concern.

Italy posted a "key reversal" the week before last and followed that with a 4 per cent decline last week. France also took a tumble, declining by 3.3 per cent.

Singapore is another market facing resistance. And as noted last week, China is also fast approaching the resistance of the 2012 highs.

There is scope for further upside in some markets in the near term, but nothing goes up in a straight line and resistance on the US and the Australian market may prove to be too hard to overcome in the near term.

If we do see these markets push decisively above resistance, we could be on the verge of an equity market "blow-off". That would be less than desirable, although profitable in the short term. At this stage, I think that is the least likely scenario, but with the US T-Bond/S&P 500 ratio and the VIX pushing below support we can't rule it out.

What would be an early sign that our market was capable of sustaining a break above resistance?

In my view, it would be a breakout in BHP Billiton (BHP) and Rio Tinto (RIO). Both are nearing their 2012 highs ($38.25 and $72.30, respectively), and if those can be overcome, there could be a surge to the upside. But we will have to wait and see on that one.