Tuesday, October 25, 2011

All Ords Dashboard Update - 25 Oct 2011

(See earlier article for a detailed explanation of this Dashboard. Essentially the top section is about timing signals and the bottom section about whether it is a likely top  or bottom in the market)

From the Dashboard it appears that a possibly sustained up trend is emerging from an approximately median market bottom on 26 Sept 2011. (See recent post on characteristics of market tops and bottoms.)

While the market is up 9% from the low it is still 15% below the April 2011 high and a sustained up trend could be reasonably expected to have a total rise of 20 to 50% or more.

From the short term chart included in the Dashboard below you can see a possible trading range of 3900 to 4400 and a longer term chart shows strong resistance at 5100. (I use Incredible Charts free version and the free data since 1984 from Yahoo Finance.)

From the Dashboard
The market is presently above its 10, 30 and 50 day simple moving averages, but below the 100 and 200 SMA's.

The 10, 30 and 50 day SMA's (as I calculate them which uses two lots of 3 days with a 2 day delay) have all turned up, but the 100 and 200 are still trending down.

The 10 has crossed above the 30 and 50 but there are no other crosses (30/50, 30/100, 50/100 and 50/200).

The market is still heavily oversold against the 200 SMA being in the 13th worst percentile since 1984. The 2 month rate of growth is not at either extreme. The market remains extremely volatile based on my calculations, being in the 95th percentile of most volatile periods.

The 1, 2, 4 and 5 year growths are all in the bottom 20 percentiles. Over 80% of the time the market shows better growth for these periods than currently.

While Japan is a cautionary tale for many of these indicators, the market has since 1984 been closer to its then all time high 92 per cent of the days. I am not very persuaded by this as the 2007 top was quite and extreme and we could be in a secular bear market with another 10 or 15 years to run so medium term cycles might be more helpful indicators than relativity to the 2007 high.

My overall conclusion is that on a break above the 4400 mark or perhaps on earlier favourable crosses of moving averages I will increase exposure to stock markets, probably in Australia.

Macro Analysis
Uncertainty in Europe looks like being resolved, at least in the short to medium term, later this week. (In the absence of full union or individual currencies it is impossible to expect that trade and performance imbalances can be resolved - Europe is on a "gold like" standard which means all adjustments are internalised, not through a floating exchange rate and/or inflation.). Even temporary resolution will likely assist market confidence globally. A Euro breakdown would be a Lehman like event, while a time delay would be a likely negative.

The US has some indicators showing that the recession forecast by ECRI and John Hussman might be avoided, although others claim that the favourable indicators are lagging or their positive performance is statistically insignificant noise.

China continues to be of some concern and this is not positive for Australia, but falls in commodity prices and the mining sector may ease the AUD and assist local manufacturers and tourism operators and any interest rate cut would provide cash to most mortgaged households and could lead to increased spending and profits.

A fall in interest rates because of slowing construction approvals (12 month average), falling house prices in some mainly regional markets and core inflation probably moving back into target range is now regarded as quite possible/likely, particularly after recent IMF growth warnings.

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