Active Investor e-Newsletter

Gary’s Comments

International equities markets had a good run since mid December to mid-late March. A retracement was inevitable. Mainstream market commentators will have their myriad of hindsight reasons why the market has fallen over the last week or so and will extrapolate the bad news. That’s their job. Along with this will flow all the predictions, good and bad but mostly bad, based on what appears to be solid sounding and convincing logic.

The fact is that nobody knows what is going to happen in the short, medium or even long term. So we have to go on the facts that lie before us. What are some of these facts?

Firstly, markets do not rise, or fall, in straight lines, regardless of after-the-fact reasons that are apportioned to why the rise or fall occurred! Secondly, low volatility periods follow high volatility periods which follow low volatility periods, and high volatility is synonymous with falling markets and low volatility with rising markets. Lastly, nobody knows with any certainty WHEN any price action will occur that they may anticipate and could be out by weeks, months or even years.

Taking this subset facts into consideration, the S&P500 rose some 22% from the end of November to early April while the Volatility Index (VIX) fell 58% from above the ‘overbought’ level of 28 to below the ‘oversold’ level of 15. Similar analysis can be conducted on all the international equity indices.

OK, so a retracement was inevitable and it has started. Now the big question is whether this is just a retracement in a market that will continue to rise in the medium term or whether it is the beginning of a bigger fall from which active investors should step aside?

To find the answer becomes a day by day proposition as different kinds of support levels are examined in different timeframes. As you will see from the chart of the S&P500 below the rising trend is still in tact and could remain so for the longer term horizon even with further falls in equity markets. However, the short term trend has changed to down.

From the analysis below, based on the evidence at hand to 11 April market closes, it is not yet time to step aside but the key support levels discussed below should be watched closely. These will tell you whether to “sell in May and go away” or to remain invested during this period for 2012.

Gold and Silver are still under the control of the fall in their prices that occurred during 2011 both ending with December lows.

Silver is stuck in a range between $31/$32 zone and $37/$38 zone which are the 23.6% and 50% retracement zones of the 2011 fall. At $31.50 Silver is at the bottom of this range so expect a short to medium term run-up to near the top of the range, but at least to $36. A fall below the support zone of $31/$32 would be very bearish for Silver.

Gold is range trading between $1600/$1620 zone and $1770/$1800 zone which are the 23.6% and 61.8% retracements zones of the 2011 fall. $1660, where Gold is right now, is at a critical short term indecision point where down trending and up trending resistance lines have collided. Keep an eye of the next 2 -3 days price action to determine whether buyers or sellers will be in control in the near term. However, being near the bottom of its trading range, expect a medium term rally towards the top of the range. A fall below the range support zone of $1600/$1620 would be bearish for Gold.

Brent Crude Oil is trading near the support levels of an upward rising channel which should see it rise back towards the $127 – $128 zone. There is significant resistance at this zone so a break above would be very bullish.

Copper has yet again failed to break above the strong resistance zone around 400 and has retraced back to a strong support area around 360. A fall below 360 will be bearish for Copper and a rise above 400 bullish.

The recent high of 1422 for the S&P500 fell just short of a long term resistance and Fibonacci extension zone of 1440 – 1450. It has now retraced to its first support zone of 1360 being the 23.6% retracement of its run-up from 25 November. Its next support zone is the 38.2% retracement zone which is around 1320. These areas as clearly shown by the magenta lines on the right side of the chart below.

The 1300 – 1320 zone is a very strong horizontal support and resistance area as shown by the blue horizontal lines in the chart.

Very strong bullish price action will find support  at the 23.6% level and strong bullish price action will typically find support at the 38% level. The 50% retracement level is also shown. Whilst retracements to this level are very common in stocks a retracement this low in an index will typically signal a change in the medium term trend and possibly the longer term trend. However, the long term trend can still remain in tact with a fall to the 50% level but this level would need to hold.

Hopefully it is obvious from the chart that any continuing weakness in the S&P500 below the 1290 – 1320 zone will be a clear signal to step aside from equities until a base is formed and another upward surge begins.

SPA3 users need to keep an eye out for a High Market Risk signal to occur for the objective signal to step aside from the equities environment until the next Low Market Risk occurs.

The middle chart shows the relative performance between the S&P500 and the All Ords.

There is strong resistance for the All Ords at the 4445 – 4500 zone. The solid black horizontal line and the 50% retracement line (blue line) depict this zone. The 4100 – 4200 zone is a strong support area as shown by the blue horizontal lines below the current price.

The All Ords is stuck in this zone and needs to break back above 4500 before any major advance is made. To do this the large cap stocks on the ASX will HAVE to join in. The recent strength in price action has mostly come from the small industrials and emerging companies sectors.

“Sell in May and go away” is talked about every year at this time of the year. The facts are that since 1990 this would have worked for you in 1990, 1992, 1994, 1998, 1999, 2001, 2002, 2006, 2008, 2010 and 2011. Now it hasn’t always been May, sometimes it has been March, April or May but I have skewed the count in favour of the “May” outcry and included these earlier months.

That’s 11 out of 22 years, or an even bet. What’s not discussed is when one should have returned to the market which is a far better question to ask and a far more difficult answer for most to provide. It changes from July the same year to the following March. This is why a market timing approach is required.

And, since 1990, the market rose to a higher level by the following May, except for 1994, 2001, 2002, 2007, 2008, 2010 and 2011. That’s 15 out of 22 that were higher the following May! And if you include the 1980’s there would be only another 3 years in which the All Ords was lower the following May: 1981, 1987 and 1989. So that’s 22 from 32 years that the index was higher the following May. In whose favour does the edge stand? Is “sell in May and go away” a valid market catchcry? For all investors?

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.

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: 11/04/2012