Thursday, December 29, 2011

2011 Year End Preview

Based on my year end preview my conclusion is that while there may be an opportunity to buy the All Ords well at current prices there is also a real,significant if improbable downside risk. By improbable I mean that based on past post 1984 performance most of my market indicators are at levels which have only subsisted or been worse about 10% of the time.

There is no buy signal on any of these major markets based on traditional Coppock 14, 11, 10 as at 28 December 2012. My Medium Term MACD 170, 150, 20 indicator shows either no action (line and signal overlaid) oscillation in the last month or continued decline. Please note that all my technical indicators are lagging and will miss the bottom and could lead to significant losses through whipsawing as in the 1998 to 2003 period.

My All Ordinaries Dashboard shows that the market is in a potential buy area (being well below most median periodic growths, oversold and well below previous highs in 2007 and April 2011), but, with the last close lower than all averages and all averages trending down there is a high risk the market could still be in a downtrend. There is, however a possibility it has commenced a very weak uptrend from the 26 September lows which had most characteristics of a median post-1984 low.

My Top or Bottom Analysis shows that the market is currently close to a median bottom as can be seen from the Dashboard, which is why I say we are in a potential buy area.

My Modified Turtle Buy/Sell indicator has been sold and there is no buy indicated or imminent, although this indicator caused whipsawing losses in the 1988 to 1993 volatile market.

My overall conclusion is that while you might like to increase holdings while the market is oversold there is still strong downside risk.

The historical post 1984 maximum loss from a situation like this was 22.3% from today's recovery to 134.7% of the 2009 bottom at day 712 after the 2009 bottom, to only 104.6% of the 1987 low at day 801 after the 1987 bottom. Those losses were fully recovered after day 951. So the 87 recovery was lower than 28 December 2011 close for 951 - 712 = 239 days or about 1 year and 1 month during the lead into and recovery from the 1991 low.

 On the BUY side, of the 5 recoveries since 1984, 4 out of 5 were only higher than the current level after day 712 right through to day 1200. Only 1987 went lower as it approached the 1991 bottom. 1987 was however the only other 50% loss market in our post 1984 data.

On the fundamentals
1. US house prices are not in an uptrend and many mortgagors are under water, so household credit growth is subdued
2. there is widespread but not quite universal fear of recession in Europe
3. there is some fear of a slowdown in China because of its reliance on Europe and unsustainable capital works spending
4. there is some fear of a US slowdown or recession because of calls by ECRI and John Hussman, although these are largely discounted based on current monthly flows
5. in Australia there has been a marked reduction in building approvals 12 month average
6. in Australia employment growth has flatlined
7. Japan still has the tsunami damage and nuclear contamination to contend with
8. in Australia house prices have fallen widely over the past 12 months and by significant percentages in some markets.
9. there are likely to be ebbs and flows of sentiment in Europe over the sovereign debt crisis.

The fact that all of these are widely known may mean that it is a time when most are fearful and therefore a time to be a greedy contrarian, or maybe you would be better to await a clear upturn or at least only buy at the bottom of the current trading range at around 4100.

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