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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
  Will this time be different? More...
• Telstra (TLS)
  A slight improvement. More...
• Independence Group (IGO)
  The risk/reward profile has changed. More...
• Flight Centre (FLT)
  The Technicals and Fundamentals are in alignment. High risk. More...
• Incitec Pivot (IPL)
  A steady uptrend. More...
• Nufarm (NUF)
  Positive from a longer-term perspective. Unclear in the short term. More...
• Tassal (TGR)
  An improving profile. 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

After pushing higher early in the week, the US equity market came under pressure on Friday. The Nasdaq Composite fell by 2.5%, outpacing losses in the S&P 500 (-1.8%) and the Dow Industrials (-1.4%).

This reversal in investor sentiment comes after several weeks of warning, so it is no real surprise.

This reaction in the US is likely to be meaningful, and as it comes at the same time as some of the major European markets are testing significant resistance, and as the emerging markets are deteriorating, the flow on effect to Australia should be negative.

The All Ords has stalled at the resistance of the January 2010 peak, and there are no indications that this can be overcome in the near term.

As has been the case for the past few months, the Resource and Financial sectors have yet to come together and move in a synchronised fashion, and this has limited upside potential in the broader market. I have been talking about this for some time and it continues to impact. Over the past couple of weeks it has been the Resources which have kept a lid on the market, as the Financials finally started to make headway.

There is no change anticipated.

In the US, the VIX has been stabilising at long-term support and this was one of the factors suggesting that the equity market was moving into a high risk environment. The index posted a 24% gain on Friday, breaking free of the small range that has contained action since early December.

(click image to enlarge)

As noted in recent reports, the support at which the VIX stabilised was the October 2007, May 2008, and April 2010 lows. Those periods marked significant peaks in the equity market. So recent action adds to the view that in the near-term, risk remains to the downside. At this stage I believe that this is a normal correction - a reversion toward the 200DMA.

India and Brazil have just tested their 200DMA and so it will be interesting to see whether or not this support level will hold. For the Bombay SENSEX index, the 200DMA is in close proximity to a 50% retracement of the May to November advance, so this level takes on added significance. And the stochastic is now testing the support of the 'signal line'. This is a strong combination, and the January and April 2010 highs also offer support (these are approximately 2% below current levels).