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August 17, 2011
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Gary’s Comments

The table below shows a totally green “% Change” column and totally red  “Intelledgence Risk Status” (Intelledgence takes a long term view using price action and momentum of price action), “Short Term Trend” and “Long Term Trend” (uses Intelledgence) columns. What does that tell us about the current state of affairs in equity markets?

Well, I am a true believer in one of Mark Douglas’s five fundamental truths about investing that “anything can happen” (I also believe in the other four). Whilst a belief that “anything can happen” means that an investor must have a neutral mindset about what can happen next (in another of Mark’s five fundamental truths) and hence remain open to the  opportunity flow from the market in an objective manner, having an edge (discussed in two of the other five fundamental truths) also means that you need to execute according to the variables that define your edge. Right now most long equity edges (as opposed to short edges) should have an investor either totally or partially in cash depending on the time-frame of investing. This certainly is not the time to be sitting with a buy and hold mentality fully invested in long only equities portfolios.

So far it appears that world equity markets have made a V bottom. However, it is still far too early to tell whether this will be the case or not. Most successful V bottoms occur after markets have fallen for some time (> 6 months). Analysing the technicals on price action, trends in all time frames are well and truly down. In the long term the 40 day SMA has crossed below the 200 day SMA on just about all equity indices around the world except for the DJIA. In the medium term, exit signals were provided months ago to lighten or totally exit portfolios with a medium term horizon (SPA3 provided an exit signal on the Australian market on 6th May, and on the S&P500, DJIA, DAX & FT100 on 29th July) and in the short term none of the indices below and many other emerging market indices have managed to register a new 7 day high with the bounces that have occurred over the last week.

In the short term look for a new 7 day high in equity indices. This will need to occur before any confidence can start to re-emerge in going long on equities, and even then with caution (small position sizes with small exposure). Until then it would be prudent to remain either totally in cash or, if you have a higher risk profile, to ensure that you maintain a healthy level of cash in your portfolio.

Overseas Markets Report
Index Close % Change Intelledgence
Risk Status
Short Term Trend Long Term Trend
Dow Jones 11405.93 1.48% HIGH Down Down
SP 500 1192.76 1.73% HIGH Down Down
Nasdaq 2523.45 1.65% HIGH Down Down
FT 100 5357.63 3.73% HIGH Down Down
Dax 5994.9 1.32% HIGH Down Down
CAC 40 3230.9 1.72% HIGH Down Down
Nikkei 9107.43 1.82% HIGH Down Down
Hang Seng 20212.08 4.56% HIGH Down Down
SSE-All 2608.17 3.25% HIGH Down Down
 

Gold has come off it’s highs. While world economic conditions continue to cause uncertainty expect gold to continue to be sought after. However, at US$1790 Gold reached a rare Fibonacci 314% extension which is the same Fibonacci extension that Silver reached between 26 – 29 April when it fell from US$49.50 to around the US$34 mark, a 30% fall. Gold could take a breather at these levels.

Silver has had its breather so may take over from Gold as the safe haven of choice for a few weeks. In the long run expect both to continue to rise if world economic uncertainty continues.

Oil fell in unison with equity markets last week however has also jumped again. Brent Oil did bounce off the bottom of its channel and has reached its median line where it could find some resistance. From here it could either retrace down to the $100 level of continue to the top of the channel to $118. In the long run, if unrest continues in the middle east oil supplying countries, expect oil prices to rise.

Commodities
Index Close % Change Intelledgence Risk Status Short Term Trend Long Term Trend
Brent Oil 109.47 6.73% HIGH Up Down
Gold 1783.4 2.41% LOW Up Up
Copper 399.4 0.60% HIGH Down Down
Lead 2355 0.43% HIGH Down Down
FX-$-EUR 1.4406 0.27% Neutral – HIGH Down Down
US $ Index 74.01 -0.80% Neutral – HIGH Down Up
CRB Index 330.19 4.45% Neutral – HIGH Down Down
Silver 3981.9 5.11% LOW – Neutral Down Up
Zinc 2152 0.19% HIGH Down Down
FX-$-AUD 1.0483 1.35% Neutral Down Down
Platinum 1818.1 3.51% LOW – Neutral Up Down
 

During last week’s rout of equity markets, the S&P500 found support at a Fibonacci cluster zone between 1100 and 1120 (not shown below). The reactionary bounce has taken the S&P500 to a weak resistance zone around 1200 level well below the stronger resistance zone at 1220.

Expect a retracement down to the 1148 – 1150 zone before equity markets decide where  to go from there. 1148 – 1150 is a horizontal support & resistance zone as well as a 61.8% Fibonacci level however the strong support / resistance zone is 1090 – 1120. A fall below this zone will be very bearish for equities. A rise above 1220 will be bullish for equities.

The 40 day SMA (green) has crossed below the 200 day SMA (blue). During last week’s week of extreme volatility the ALL ORDS actually outperformed the the S&P500 (see RSC in middle chart below). The daily SIROC is beginning to rise from an oversold zone.

 
Local Market Report
Index Close % Change Intelledgence Risk Status Short Term Trend Long Term Trend
All-Ords 4317.3 5.38% HIGH Up Down
Information Technology 477.6 2.75% HIGH Down Down
Consumer Discretionary 1230.2 6.17% HIGH Up Down
Materials 12449.67 5.30% HIGH Up Down
Energy 13694.1 5.69% HIGH Up Down
Property Trusts 768.5 4.52% HIGH Up Down
Financials 3871.4 4.06% HIGH Up Down
Consumer Staples 7436.2 5.80% HIGH Up Down
Health Care 7916.5 7.93% HIGH Up Down
Telecommunications 1065.9 11.15% LOW Up Up
Industrials 3368.5 5.65% HIGH Up Down
Utilities 4257.3 5.24% Neutral – HIGH Up Down
 

On the ALL ORDS the 40 day SMA crossed below the 200 day SMA on 14 June and is now placed well below the 200 day SMA. Also, most equity indices are placed well below their respective 40 day SMA’s. A reversion to this mean will occur through movement of both price and the SMA.

Despite falling right through it intraday,  the 4100 – 4200 zone is a strong support zone for the ALL-ORDS. Expect it to find support in and around these levels if further falls occur. 4500 – 4600 is also a strong support & resistance level. Expect resistance overhead if the ALL ORDS rises to to this zone. These are the important zones while revised price discovery takes place over the next few weeks.

As I’ve stated many times the ALL-ORDS has been underperforming the USA equity indices (and many others) for many months. The bottom RSC chart shows that  it has more or less matched the Chinese Shanghai Index.

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 02/08/2011 09/08/2011 16/08/2011 Weekly Move % Top Mover % Gain Transactions
Intelledgence $432,350.37 $393,088.86 $408,944.11 4.03% SBM 8.93% 0
SPA3 Portfolio $448,772.79 $416,165.66 $421,883.50 1.37% LCY 32.56% 0
SPA3 Hedge $514,078.00 $524,072.83 $504,551.95 -3.72% LCY 32.56% 0
SPA3CFD $58,043.01 $57,473.31 $55,857.96 -2.81% EAU 13.09% 0
 
Compounded Annual Return
Portfolio 1 Year 3 Year 5 Year 10 Year
SPA3 Portfolio -0.80% 1.41% 7.59% 13.66%
SPA3 Hedge 4.80% 0.64% 11.06% 15.92%
SPA3 CFD 4.28% 17.70% N/A N/A
All-Ords -3.32% -5.02% -2.61% 2.81%
All-Ords Accum Index 0.68% -0.77% 1.50% 7.07%
 

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: 16/08/2011

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