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By December 1, 2011November 15th, 2023Market Commentary, Uncategorized

Gary’s Comments

Last night most of the international equity indices changed from short term down trends to short term up trends, in the table below. The three USA indices were already in Long Term Up Trends, according to our Intelledgence system’s rules. Note though that the Risk Status is still High for these indices.

The back drop to world equity markets is still poor. The problems being dealt with are significant in nature as governments’ appetites for debt the world over clash directly with the economic fall out of them living way beyond their means over the last two decades. Despite this back drop equity indices are trying to rise.

As I have said many times before in the this newsletter, economies and markets are seldom in sync. If they were, the Australian bourse would have risen strongly during the GFC period when our economy was relatively so strong compared to all other economies around the world. Markets look forward and economic data looks back.

There are many stocks in Australia trading at low PE’s and hence high earnings yields (EY). For example, the four major banks have PE ratios ranging from 8.8 to 11.9, EYs from 8.3% to 11.3% and 100 franked DYs from 6.7% to 7.5%. The two biggest resource companies in Australia, BHP and RIO, have a PE Ratio of 8.7 & 8.6 and EY of 11.4% & 11.6%, respectively. The overall ASX has a PE of 11.88 and the long term average is around 16. Dell, listed on the Nasdaq, has a PE Ratio & EY of 8.4 & 12.3%, respectively. Compared to historical average PE Ratios and EYs, these would indicate very good value. And many other stocks are have similar ratios.

However, sentiment is obviously still negative due to the economic concerns in the major trading blocs around the world. Throw some positive sentiment into the mix and things could change quite rapidly.

Note that the JSE All Share Index is 1.3% away from a new all time high while the ASX is 39% below it’s all time high and the S&P500 is 20.4% below.

Lastly, some of the contrarian indicators are near extremes. For example, trading volumes are at extreme lows amongst retail investors as they have fled the market in droves over the last 12 – 18 months and sentiment indicators such as net new cash flows into mutual funds are also approaching extremes with 7 straight months of outflows. It’s usually at these times that things can change.

Overseas Markets Report
Index Close % Change IntelledgenceRisk Status Short Term Trend Long Term Trend
Dow Jones 12045.68 4.80% Neutral – HIGH Up Up
SP 500 1246.96 4.96% HIGH Up Up
Nasdaq 2620.34 3.93% HIGH Up Up
FT 100 5505.42 7.11% HIGH Up Down
Dax 6088.84 11.56% HIGH Up Down
CAC 40 3154.62 11.77% HIGH Up Down
Nikkei 8434.61 1.44% HIGH Up Down
Hang Seng 17989.35 0.70% HIGH Down Down
SSE-All 2333.41 -2.57% HIGH Down Down

Some commodities also changed from short term down trends to short term up trends last night, in particular Copper and Gold.

Some commentary on the $US. A cycle has established itself over the last couple of years whereby the $US moves counter to equity and most commodity markets. This means that when equities and commodities rise the $US falls, and vice versa. This also means that many commodities are moving is a similar direction (not necessarily magnitude) as equities, at least on a daily basis. This means that the $A and ZAR tend to rise when equity markets rise.

This relationship has not always been in place and should change again at some stage but for the time being to this means that the $A and ZAR will get stronger against the $US if equity markets rally, and get weaker if equity markets fall as the $US remains the safe haven against equity weakness.

Index Close % Change Intelledgence Risk Status Short Term Trend Long Term Trend
Brent Oil 110.82 1.64% LOW Up Up
Gold 1745.5 2.53% LOW – Neutral Up Up
Copper 356.3 6.90% HIGH Up Down
Lead 1999 1.16% HIGH Up Down
FX-$-EUR 1.3441 0.80% HIGH Down Down
US $ Index 79.007 0.95% LOW Up Up
CRB Index 313.82 0.93% HIGH Down Down
Silver 3273.1 -0.67% HIGH Down Down
Zinc 1936 0.36% HIGH Up Down
FX-$-AUD 1.0274 6.09% HIGH Up Down
Platinum 1560.8 -0.65% HIGH Down Down

The S&P500 moved back into its dominant trading zone of the past few years, that is, above 1220. It next major resistance zone is 1300 – 1320 and support is the level it just broke above, 1220. This is a significant move.

The next few days will tell whether last night’s move was mainly short covering or strong buying. Technically, the S&P500 has registered a higher low and now needs to make a higher high, preferably above 1300. This is the next key technical criterion that needs to be met.

The daily SIROC has turned. The SMA 40 is rising and price is approaching the SMA 200 again. The S&P500 has reached its downtrending trend line above. It will either break above this resistance line with gusto or retrace to or near the rising trend line below. The former would be far more bullish.

Local Market Report
Index Close % Change Intelledgence Risk Status Short Term Trend Long Term Trend
All-Ords 4184.7 1.43% HIGH Down Down
Information Technology 500.3 0.14% HIGH Down Up
Consumer Discretionary 1220.3 0.84% HIGH Down Up
Materials 10930.05 1.21% HIGH Down Down
Energy 13415.6 -0.10% HIGH Down Up
Property Trusts 811.7 5.80% LOW Up Up
Financials 3914.7 3.34% HIGH Down Up
Consumer Staples 7444.2 -0.81% HIGH Down Up
Health Care 7842.3 0.98% HIGH Down Up
Telecommunications 1081.2 1.21% LOW Up Up
Industrials 3387.5 1.51% Neutral – HIGH Down Up
Utilities 4439.6 0.26% LOW – Neutral Down Up

The ALL ORDS continues to lag the S&P500 and the JSE-ALSH. Compare this chart to the S&P500 above to note the obvious relative weakness. While the $A cycle with the $US, as mentioned above, remains in place, i.e. the $A will strengthen when US equity markets rise(and hence the All Ords rises), it is difficult to see how the All Ords can catch up as the strong $A seems to be a handbrake on Australian equities. This is not the case with the JSE whihc is near all time highs.

This leaves one to ponder what may break this cycle and get a rising All Ords again, which will need the 4 main banks and large resources companies to start rallying strongly. Possibly a fall in our interest rates and / or a corresponding rise in US interest rates or genuine investment interest in Australian stocks pouring in from offshore, something that appears to have been lacking over the last two years.

Whatever it is, when it does break get ready to act as it may be a fantastic rally against a high risk back drop. However, the dampener of Europe still hangs above our heads like the sword of Damocles………….

The SPA3 public portfolios continue to outperform the market by a large margin. See the performance table below that shows the comparative compounded annual returns.

Portfolio Summary
Portfolio 16/11/2011 23/11/2011 30/11/2011 Weekly Move % Top Mover % Gain
Intelledgence $409,806.36 $396,750.43 $401,916.57 1.30% MAH 3.39%
SPA3 Portfolio $417,651.05 $404,825.87 $403,779.21 -0.26% IIN 9.23%
SPA3 Hedge $488,672.81 $478,853.02 $470,500.77 -1.74% BRU 5.98%
SPA3CFD $49,451.53 $45,510.20 $42,956.48 -5.61% WEB 0.00%
Compounded Annual Return
Portfolio 1 Year 3 Year 5 Year 10 Year
SPA3 Portfolio -15.17% 6.65% 3.86% 13.03%
SPA3 Hedge -10.47% -2.33% 6.71% 14.24%
SPA3 CFD -34.86% 12.27% N/A N/A
All-Ords -10.52% 4.45% -5.19% 2.48%
All-Ords Accum Index -6.59% 9.04% -1.12% 6.77%

Share Wealth Systems provides more detail on all of the above items at our eUGMS. The eUGMs are monthly multimedia presentations available to Share Wealth Systems members only.

The figures used in this Active Investor are based on data prices as of: 30/11/2011


  • mandla says:

    Thanks for headsup highly appreciated.

  • Rick Peters says:

    I liked your review of things.

    In regard to the AORDs lagging the S&P 500, do you support the view that the key reasons behind this lag are 1) AUD$ strength, b) when the GFC happened huge amounts of foreign capital were pulled out of our market and as yet, have not returned and c) lack of overall demand for aussie equities as the retailers have fled in droves and at the large end of town, significant portions of funds are being invested in cash or foreign investments?

    I can see no other reasons why our markets are performing so poorly and until such time as the AUD retreats back to at least the 85c mark, I cannot foresee a flood of foreign capital entering our equity markets.

    • Gary Stone says:

      Response to Comment by Rick:

      Agree with 1) / a) and mostly with b) and all of c).

      The high AUD does make it difficult for foreign investment into our equity market especially because if the internationals start pouring in and the AUD falls it is highly unlikely that equity gains will make up for a potential fall in the AUD and hence the value of their investments. Their is one caveat to this and that is if foreign capital does come pouring into our market is highly likely that the currency exposure of the capital will be hedged which will mean shorting the AUD which will put downward pressure on the AUD and upward on the USD (if the source is USD). However, there are more variables involved making it a lot more complicated.

      The problem is that the USD is still seen as the safehaven investment instrument when things start getting testy, even above Gold & Silver, expecially for short term requirements (despite all the newsletters and doomsdayers pouting g & s like it is “going out of fashion” and doomsdaying the USD). This means that when equities markets rise the USD will fall which means that the AUD will rise. Therefore, it is highly unlikely that we will see rising equity markets and falling AUD which will mean that the Australian equity market will continue to lag. Until the current world financial paradigm sorts itself out and the current nexus between equities markets and the perceived safehaven status of the USD changes. At the moment it is the USD vs the rest. It hasn’t always been like this and it will change again at some stage.

      Partly with b) because it wasn’t only foreign capital, also local.

      RE c). Active retail investors have fled the market in their droves. We know this from massive reductions in retail brokerage at the major brokers like Commsec and E*Trade. However, this is not a new phenomenon. Retail investors have always been caught at the wrong end of major market moves, that is, most are in at the top and most of the way down and most are out at the bottom and most of the way up. This market will have a strong up trend again at some stage and when it does most retail investors will be out of the market for most of the run-up. Even with all the communications devices and internet information this will happen again and again becuase it is human psychology that is the main determinant, not the tools and information that are available.

      Being available and aware is one thing, acting in the heat of the moment is another. Right now equity markets are looking as good as they have for some time but everybody is three times bitten twice shy. It will be interesting to see how investors react if the equity markets continue to rise and take out more resistence levels.

      Another reason, say d), is that there is a massive lack of business and consumer confidence in Australia at the moment. Retail companies like Billabong, JB Hifi, Myer etc doing so badly is not just due to online shopping, it is mainly due to consumers not putting their hands in their pockets at all and saving their pennies. In my view a hung parliament and poor political leadership also has a lot to do with creating uncertainty amongst our investing community. Good leaders instil confidence, commitment and clarity and motivate people to go into action to do their thing. Poor leaders suck confidence right out of people, regardless of how good the product, service or their lot is.


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