edition 1 - chartered 16th march 2010
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8/9/2019 Edition 1 - Chartered 16th March 2010
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Chartered
Fortrend Securities
‐Wealth
Management
Edition No. 1
16th March 2010
Bottom Line: The internal strength of global stock markets appears to be weakening over recent months. While higher prices are still possible, evidence is mounting that we could be close to the end of what we currently label a Wave 2 counter trend rally for the S&P 500, which has taken place within the context of what appears to be a larger secular bear market Elliott Wave pattern. Investors should be considering ways in which to manage this risk. Chart 1 – US S&P 500
• According to Elliott Wave International (The World’s most notable Elliott Wave Technicians) the
S&P 500 is in the process of etching out a Wave 2 counter trend rally within the context of a larger
degree Wave C Primary Degree bear market wave structure.
• Bottom line is that if they are right, we can expect to see materially lower share prices over the
coming two years.
• Factors which
appear
to
be
supporting
this
view
include
the
noticeable
decline
in
the
strength
of
the oscillator (divergence) while the market rallied from March 2009 to current levels.
• The negative strength of the oscillator during Wave 3 (between May 2008 and November 2008) is
also a solid confirmatory signal, providing confidence that the labelling of Wave 1 from October
2007 to March 2009 of a larger Wave C move is correct.
• Important note to remember when considering Elliott Wave analysis is that Wave 3 is always the
strongest price move as it reflects institutional activity. And while it is not necessarily the longest
price move, it is never the shortest.
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• Given that, the next move forecast from Elliott Wave International, which we currently view at this
stage as the most probable, is the commencement of a Wave 3 decline in prices upon the
completion of the current Wave 2 Primary Degree counter trend rally.
Chart 2 – US S&P 500 ‐ Closer Look
• The noticeable decline in volume from March 2009 till now, as indicated by the green 20 day
moving average line, also suggests that institutional support for this rally is waning.
• Of particular note is the divergence occurring with volume and price in the most recent rally from
early February 2010 to where the S&P 500 has just recently made a new high. This divergence is
consistent with a Wave 5 move, the last Impulse Wave in a 5 wave trend, where institutions
typically
sell
to
retail
investors
who
are
buying
into
the
market
at
or
near
the
peak.
Chart 3 – S&P ASX 200
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• The ASX 200’s rally from March 2009 has broken below the uptrend support line (as represented
by the green line on the chart) which connects with the end of Wave 5 of Wave 1 (or Wave A) of a
larger degree and Wave B of Wave 2 (or Wave B) of a larger degree.
• While prices remain below the January 2010 peak, I am inclined to label the retracement from
January 2010 to February 2010 as the first Wave of Wave 1 of either a Wave 3 of C or simply a C
Wave. Either way both waves are bearish.
• In short, while prices remain below the January peak, I am therefore inclined to view recent moves
as
the
initial
stages
of
the
next
leg
down
in
what
appears
to
be
a
secular
bear
market.
• The ASX 200’s weakening oscillator also indicates the internal strength of our market is also
declining.
Chart 4 – S&P ASX 200 ‐ Closer Look
• While further price rises could occur, the weakening of the oscillator from August 2009 through to
March 2010 suggests, at this stage, any strengthening of prices is likely to be short lived.
• Since September 2009 to date, the market has been largely range bound between 4,500 and
approximately 4,800. This is also an interesting pattern which has formed as range bound trading
such as this typically tends to occur during what is commonly referred to as a “distribution phase”.
• Distribution is referred to in technical circles when institutions who hold large amounts of stock,
tend to gradually feed that stock into the market in a controlled manner and distribute that stock
to typically unsuspecting retail investors.
• Institutions will support stock prices at a particular level to encourage buying so that they can
unwind
their
positions
in
an
orderly
manner
without
putting
pressure
on
stock
prices.
This
tends
to
be reflected in a chart which displays sideways price movements, or channel trading such as that
demonstrated in the above chart.
• On the flip side however, this could also be viewed as consolidation before prices rise to new highs.
One factor weighing against this scenario, however, is that consolidation usually occurs within the
context of an upward trend. In this instance here, the trend support line has now been broken.
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Chart 5 – S&P 500 V’s Mutual Fund Cash to Assets Ratio
• Bull markets require fuel to reach new highs while bear markets often reflect the absence of that
same fuel. That fuel is cash from institutional investors who have the buying power to push prices
higher and selling power to move prices lower.
• Courtesy of
Elliott
Wave
International’s
March
2010
edition
of
“Financial
Forecast”,
the
above
graph shows the percentage of US mutual funds cash holdings as a percentage of total assets.
• This graph shows a strong relationship with US mutual fund cash holdings and the performance of
the US stock market.
• When cash holdings peak, the subsequent draw down after that peak tends to coincide with a
rising stock market as these cash holdings are progressively invested into the share market.
• When cash holdings are low, the subsequent outcome tends to coincide with the onset of US share
market weakness, as there tends not to be enough fuel to sustain increasing prices.
• With US mutual fund cash holdings close to all time lows, this tends to provide further evidence
that key internal indicators of market strength are not supportive of material further price
increases,
but
rather
questions
the
sustainability
of
the
rally
from
March
2009.
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Chart 6 ‐ AUD/USD performance since AUD floated 8 December 1983
• The above
chart
shows
the
Australian
dollar
versus
the
US
dollar
since
8 December
1983,
when
the
Australian dollar was first floated.
• It is evident since that period that when the AUD trades at or above approximately USD$0.88 the
currency does not tend to remain above this level for too long before weakening and often
weakening quite rapidly.
• A similar story can be said when the AUD falls to around USD $0.60 cents. Subsequent moves tend
to be quite strong to the upside.
• It is also evident that in times of global economic uncertainty, the USD is the investor’s choice of
currency as they seek the protection of the currency which is perceived to be the strongest and
move away from commodity influenced currencies such as the AUD.
• Examples of
such
times
include
the
Asian
financial
crisis
from
1997
to
1998,
again
in
2000
to
2002
when the technology bubble was bursting and again in mid 2008 to early 2009 as the global
financial crisis was reaching its peak.
• Once again, the evidence of history does not appear to support further material increases in the
AUD.
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Chart 7 – US Mortgage Rate Resets
• The above graph shows the value of US mortgages which are due to have their interest rates reset
to higher interest rates over the coming 2 years. It also shows the value of sub‐prime loans which
had their loans reset to higher interest rates during 2007 and 2008.
• Evident above is the increasing value of mortgages which begin to reset to higher interest rates
from this month.
• While
the
next
wave
of
mortgage
resets
are
based
on
loans
which
are
consider
higher
quality
loans
than the Subprime loans which caused so much damage during 2007 to early 2009, the US now has
a much higher level of unemployment when compared to the beginning of the financial crisis
(9.7%), indicating that many more households are now surviving on reduced levels of income than
would have previously been factored in when these loans were first made.
• Could this be the catalyst for markets to begin to move lower over the rest of the year?
• It is also important to remember that a large number of mortgages issued in the United States are
done so on fixed interest rates. Therefore, unlike here in Australia, borrowers in the US tend not to
receive the same relief from lower central bank interest rates as would occur here in Australia.
For the moment markets tend to be treading water waiting for the next catalyst to provide a break out
from the recent consolidation patterns that have formed. While higher prices can’t be ruled out, it now
appears the
risks
to
investors
appear
to
be
building
more
so
to
the
downside.
Several
key
market
internal
strength indictors, such as the oscillator and volume are now displaying waning strength while the Elliott
Waves structures continue to support the view that a longer term bear market is still in play. With evidence
now mounting in favour of market weakness over the coming 1 to 2 year period, it is our view that
investors should be considering ways in which to manage this risk.
We hope you have enjoyed the first edition of Chartered and found the content of interest. If you would
like me to analyse a particular market or chart from a technical point of view, please email your requests to
[email protected] and we will endeavour to look at any requests in upcoming editions.
We are here
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In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies
which can be used to help you navigate the prevailing market conditions, please do not hesitate to contact
me.
Until till next time, have a great fortnight!!!
JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin
Investment / Financial Adviser FORTREND SECURITIES ‐ WEALTH MANAGEMENT Australian Financial Services Licence No. 247261
Chartered is a fortnightly publication from Fortrend Securities – Wealth Management and is provided for the purpose of general information only. The views and opinions expressed in the publication are those of Joel
Hewish and do not necessarily match those views of Fortrend Securities – International Advisory. This publication is provided as general information only and does not take into account your personal
circumstances, aims and objectives and should not be considered personal advice. You should first consult a licenced Investment or Financial Adviser before acting on any of the information provided in this
publication.