Posts Tagged ‘ASX200’

Stock Market Analysis: When is the market most likely to go up?

Friday, June 3rd, 2011

This is obviously a question that all traders are attempting to answer, using many different forms of analysis, but today we will consider this by taking a look at the overall market on a day to day basis. To start we will consider days of the week.

Which day of the week is the market most likely to go up?

From the chart below we can see that Monday has been the standout performer for the last 10 years, with Thursday following along close behind. The blue line in the chart shows how often a day is higher or lower, with Thursday being up almost 75% of the time. As we established last week, Thursday has the highest win percentage of the weekdays.

The two bars show the average return and median return, which answers the question, how much does the market go up? There is a difference between the average return and the median return on Thursday while the two measures are more consistent on a Monday. Let me explain how this difference arises.


The average of a set of numbers is the total of all the numbers divided by the number of items in the set. The median of a set of numbers is simply the middle number when the set is arranged from smallest to largest.

If a set of numbers is normally distributed (which means they follow a bell curve around a centre point) then the average and the median will be similar. However, consider the following set of numbers 10, 10, 10, 10, 10, 10, 100,000: the average here is $100,060 divided by 7 = 14,294, while the median is 10. Obviously there is an enormous difference between these two numbers.

Stock market returns do not follow a normal distribution as more extremes occur than would be expected. A very high number biases the average up, while a very low number biases the average down. By considering the median and the average we can see whether the data is skewed by an extreme data point. In the data above Thursday’s performance is being pulled down by some bad Thursdays. These occurred in 2000 during the tech crash and if you can remember back then you’ll know it wasn’t just Thursdays that were affected.

Moving on to look at the week of the month we can build the following chart from the performance of the S&P/ASX 200. From this chart we can see the standout performer is week four, followed by week one. And remember to watch out for week two, it is definitely the “weekest”.

Expanding the time-frame one more time we can consider the strongest month, which is a close call between March, April, August or December. August does however come out ahead being higher over 80% of the time during the last 10 years. May, June and July are all weak which is right now, so do not expect a stellar performance from the stock market at this time of the year. This does not mean there is no movement, but on average the movement at this time of year cancels out, making picking the direction far more difficult.

These historical tendencies are a guide to what may happen in the market, but not a guarantee. The market is typically strong around the end and the beginning of the month. This did not happen last month and provides clues that there may be a larger fundamental movement underway. If the market is weak when it is normally strong then, it is likely to be very weak when it is normally weak.

Bu Jeff Cartridge
Education Manager

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Stock Market Analysis: 2011 Q1 Quarterly Review – Part 2

Friday, April 15th, 2011

Q1 2011 Quarterly Review Part 2: Australian Market Performance by Market Capitalisation

The first quarter of 2011 provided some major challenges for investors and the market. Floods and cyclones across eastern Australia, geopolitical unrest in the Middle East and North Africa, sovereign debt concerns in Europe and of course the Japanese earthquake, tsunami and nuclear crisis have produced major volatility throughout the quarter and changed investor confidence.

In Part One of our Q1_2011 Quarterly Review we examined the market on a sector-by-sector basis and gave our forecast of themes for the investment landscape for Q2 2011.

Today we’re reviewing the ASX market’s first quarter performance as measured by market capitalisation. This performance is illustrated in the chart below.

ASX Performance Market Cap_March 2011

ASX Performance Market Cap_March 2011

Chart: ASX Market performance by Market Cap for the Quarter Ending 31 March 2011.

Why Consider Market Capitalisation?

There are a number of reasons why investors and traders will look at market cap as a criterior when selecting stocks. Depending on the size of the investment portfolio liquidity may be an issue, and options traders will likely only consider the ASX 20 for liquidity reasons. Large cap, mid cap and small cap market segments will perform differently at various times in the market investment cycle.

Large caps tend to outperform when investors are more cautious or bearish, while small and mid caps are more likely to outperform when the bulls are in control, as this is when traders are more likely to accept the inherent risk.

For the purpose of analysis we have defined large caps as: ASX20 (.AXTL), ASX50 (.AXFL), ASX100 (.AXTO), ASX200 (.AXJO) and ASX300 (.AXKO). Mid caps: ASXMidCap50 (.AXMD), ASXMidCap_Industrials (.AXMD), and ASXMidCap_Resources (.AXMR). Small Caps: ASXSmall_Industrials (.AXSI), ASXSmall_ORDS (.AXSO), and ASXSmall_Resources (.AXSR).

Note: codes in brackets are for use in the Market Analyser software. Use these codes to review indices, and drill down to examine the stocks within. If you are not a Market Analyser user, sign up now for a free software trial.

Rolling Year-on-Year (YoY) Performance

The rolling year (YRRolling) performance (as shown by the black bars) illustrates just how difficult this market has been for long term investors, who tend to concentrate on large cap stocks. Annual performance has been generally negative, with the clear exception of mid and small cap resource stocks both segments rose over 26% for the YoY. The stocks making up the Small Ordinaries index also outperformed, up 10.6% YoY, while the Small Industrials and MidCap Top 50 eked out gains of around 2% YoY.

The other indices examined had negative performances of around -2% YoY, with MidCap Industrials the worst performers, down over -5%.

So investors or traders who ignored the mid and small cap resources (and the Small Ords) segments of the market will have underperformed for the year.

Monthly Performance

We saw the market volatility spike in March due to the Japanese disaster, but the market has undergone a stellar recovery from the lows of the severe sell-off. March performance (Mth (MAR)) (as shown by the green bars) has been flat across the board, which is surprising given the huge sell-off triggered by the Japanese disaster. However the small caps and mid caps underperformed and finished in the negative, indicating that investors are becoming more risk-averse due to the market volatility. For the month of March the S&P/ASX 20 and the Small Caps Industrial managed to finish over 0.5% higher for the month.

Quarterly Performance

The quarterly (QTR_11Q1) performance (as shown by the blue bars) has revealed strength in the market leaders (measured by market cap). We highlighted in our report last quarter that investors would likely be taking profits on their small and mid cap resource stocks, moving their funds to the larger cap, more liquid stocks. The market volatility has been a catalyst for this rotation of funds. The top ASX 20 to ASX 300 stocks rose around 2% for the quarter. This performance was similar to that of the previous quarter, but performance of other market segments has turned around significantly.

The quarterly performance of the mid caps was relatively flat, however this is a significant turnaround for the mid cap resource stocks which were down -0.7%, down from 28% in the December quarter.

The small caps have also experienced a turnaround with small cap industrials managing to stay in the positive, up 0.9%, while the Small Ords and small cap resources finished down -1.9 and -5.3%, down sharply from 10.7 and 19% in the December quarter.

So investors or traders who failed to take profits in the small or mid cap resource segments of the market will have been hurting this quarter.

Weekly Rolling Performance for April 2011

We have analysed what has happened in the market for April so far. The weekly rolling (WkRolling) performance (as shown by the red bars) illustrates that the new quarter has begun with some selling/profit-taking, with under performing sectors last quarter leading to the recent sell-off lower. Only the ASX 20 and ASX 50 stocks have managed to eke out gains in early April, up 0.8% and 0.4% respectively.

The ASX MidCap 50, MidCap Industrials, and ASX SmallCap Ordinaries have all pulled back are least 1%, while SmallCap Resources have pulled back nearly -2%. The market closed at its lowest level in nine trading sessions overnight which points to weakness in the near term.

Conclusions

Again investors who trade larger cap stocks could have simply concentrated on the S&P/ASX 20 and still have generated a similar performance to those who used the S&P/ASX 300 as their stock investing universe. This is something that longer term investors should note, as it is much easier to keep track of 20 stocks versus 300 stocks, and investors can boost performances through the use of options on the top 20 stocks.

There has been a big turnaround in the stellar performances of the small cap and mid cap resource stocks, which is pointing to investor risk aversion. The market has experienced fantastic gains since the turnaround from the GFC in March 2009, but now markets globally are trading near key resistance levels and investors are becoming more cautious. Investors need to take advantage of the cheap insurance being offered through the options market to protect long-term positions. There is still M&A activity in the market as evidenced by the recent takeover bid for Equinox, so nimble traders can still profit.

The Trade

The market remains a stock picker’s market as shown in the market performances over the past quarter. Those subscribers who follow the recommendations of MDS Financial Research get timely recommendations of trading opportunities as individual stocks start to move.

In summary the ASX20 and ASX50 stocks have outperformed. M&A activity will be a key driver going forward, particularly if we continue to see a pull-back in the resources sector, after Goldman Sachs recently made a call to take profits on commodities, given their spectacular performance. Aussie interest rates are likely to remain on hold for the near-term and the Aussie dollar being at record levels will impact corporate earnings.

Given the market performances over the past quarter and year-on-year, there are a number of strategies traders and investors can use, including relative strength comparisons and mean reversion.

1) Investors who use relative strength comparisons and look to trade strong stocks in strong sectors should concentrate on the larger cap stocks from the S&P/ASX 20 through to the S&P/ASX 300 universe of stocks. Using relative strength we would expect Small Ordinaries and SmallCap Resource stocks to continue to under-perform.

2) Investors who use a mean reversion strategy may want to concentrate on the SmallCap Resource and the MidCap Resource stocks, which have been underperforming the broader market, and if they are looking for the market to pull back, then they may look to the larger cap stocks to retrace.

Investors should gain confidence from the larger cap stocks holding on to their performances, but they may be tested with the indices trading around the 5000 level in 2011.

The investment themes for the next quarter will be:

* the economic recovery from the domestic floods and droughts
* the global economic recovery from the Japanese disaster
* geopolitical unrest in the Middle East and North Africa
* commodity supply constraints and pricing
* the strong Aussie dollar
* corporate earnings – can companies pass on higher input costs?
* interest rates and inflation
* continuing M&A activity

Stay tuned for further analysis of performances, as next time we will examine the performance of commodities in relation to stocks.

By Michael Hevern
Head of Research

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Stock Market Analysis: Is the Australian Market Overbought?

Friday, February 18th, 2011

The Australian market has been climbing strongly higher during the last two weeks, but is it overbought at the current levels?

The term overbought simply means it has climbed too high, too fast, and in this situation there is the possibility of the market pulling back. We can use some of the indicators found in The Bourse to answer this question.

The indicators that are used to show overbought or oversold conditions are known as oscillators. These fluctuate backwards and forwards between two extremes, often 0 and 100, or -100 and +100. When the indicator is at the lower level it shows an oversold condition and when it is at the top it shows an overbought condition.

Oscillators that are widely used include Relative Strength Index (RSI), Stochastic or the Williams %R. In The Bourse, when you click on the IND button at the top of your chart, you can select the indicators you want to use from the menu. Click on the Oscillators heading to display the indicators available.

The list includes RSI, Williams %R, Price Oscillator, Momentum, Stochastic and MACD. I personally use the MACD to identify trends, and not as an indicator to identify overbought or oversold conditions.

The Relative Strength Index (RSI)

The RSI shows the relationship between up movements and down movements in the share price. The more up days that occur, the higher the RSI value. Typically the indicator is calculated over 14 days. When the RSI hits an extreme, which is measured as below 30 (oversold), or above 70 (overbought), then look for a reversal in the current trend. By applying the RSI on to the chart of the Australian market (XJO) we can clearly see an overbought condition with an RSI of 84. This is well above 70, which is considered overbought.

The Stochastic (Cstats) Indicator

The stochastic is a fast moving oscillator that identifies whether the share is closing closer to its highs or lows. Time frames used can vary, but here we use 14 days and the slow stochastic is normally smoothed by a period of 3 days. The extremes in the stochastic are typically identified as 20 (oversold) and 80 (overbought) from which a reversal is expected.

Adding this to the chart shows the stochastic is also in overbought territory with a reading of 96. Clearly the market is overbought at current levels, but this does not mean we are about to enter a new bear market. It simply means the risk reward favours a trade in the downward direction or locking in some profits. A similar setup in mid December led to a small decline in early January, while the peak that occurred in early November resulted in a more substantial decline through November.

You can use oscillators in The Bourse to identify overbought conditions. These can be a useful guide to assist you to know when to take profits or even to sell short. The same indicators can be applied to individual shares as well as the market as a whole.

By Jeff Cartridge
Education Manager

Sign up for a 14 day free trial of The Bourse and try using oscillators to identify overbought conditions yourself!

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A Word of Caution for the Bulls

Friday, November 19th, 2010

The markets have had a strong run since early July, with recent peaks such as the S&P ASX200 up 14%, the Dow Jones up 18% and the Chinese Shanghai Composite up 33%. Traders have been pushing stock prices higher on the promise of further cheap money ever since the US Federal Reserve announced the prospect of a further round of quantitative easing (QE2) in early September. Earlier this month the Fed quantified QE2 with a detailed plan to buy an additional $600 billion in government bonds at a rate of around $75 billion per month.

Investors are now looking for the next catalyst(s) that will determine the market direction through to the end of the year. Recent reports of key global economic drivers have been mixed and there appear to be headwinds for trading near-term. The Eurozone concerns over sovereign debt issues in the PIIGS economies have resurfaced, particularly for Ireland, Greece and Portugal. In Asia the Chinese government is poised to pursue further tightening measures in an attempt to reign in asset prices, having last week announced increased requirements for capital reserves in their financial institutions. There is also speculation that further interest rate rises will be required. In the US there are continuing problems with the “jobless” recovery and with municipal debt obligations.

A number of markets globally are setting up for potential “bull traps” having backed off key levels in the past couple of weeks. Markets that look set to complete two solid down weeks include the Dow Jones (.DJI), S&P500 (.GSPC) and the tech-heavy Nasdaq (.IXIC). The UK’s FTSE (.FTSE), China’s SSE Composite Index (.SSEC) and the S&P ASX 200 (.AXJO) also look set to end the week lower again. The strengthening US dollar is driving commodity prices and even copper and crude oil have set up for lower prices near-term.

Bull Traps

A bull trap occurs when investors take on a long position on a stock or index that is breaking out to new highs, only to have the stock/index reverse and shoot lower. This counter move produces a trap for the bulls and often leads to sharp sell offs.

The criteria for a bull trap setup:

1. Prevailing long term down trend.
2. Sharp correction that has moved quickly from its lows.
3. Resistance where investors look for price rejection setting up a long squeeze.

Bull Trap Setup

The bull trap setup is fairly basic. Look for a trading range to be broken to the upside, preferably with high volume. The stock/index will need to get back below resistance within five trading periods and then explode out of the bottom of the range. The last component of the bull trap chart pattern is that the stock/index should have a wide price trading range. This increases the odds that the stock/index will have room to trend lower in order to book quick profits.

Bull Traps Market Psychology

Selling in the first wave will occur when the most recent swing low is exceeded. This occurs because of the number of shorter-term traders who have their stops slightly below the most recent swing low. The second wave of selling comes into play once the medium term traders realise that this is not just a slight retracement and the move is likely to be more protracted. This produces the second round of selling.

Bull Traps Trading Examples

Recently there has been a number of prime examples of bull traps, illustrated below with the Chinese Shanghai Composite (.SSEC), the US Dow Jones (.DJI) and S&P ASX 200 (.AXJO).

Bull Trap Chinese Shanghai Composite (.SSEC)

Figure 1: Bull Trap – Chinese Shanghai Composite (.SSEC)

The Chinese Shanghai Composite recently broke to the upside to an 8-month high, but the bears then stepped in, sending the price through the recent trading range within a few trading sessions, and therefore completing the bull trap. The index dropped -11.4 percent in 6 trading sessions. The sellers have blasted through the key support levels and the bears appear to be firmly in control in China.

Bull Trap US Dow Jones (.DJI)

Figure 2: Bull Trap – US Dow Jones (.DJI)

The US Dow Jones recently broke to the upside to close at a 7-month high, then saw follow through buying the next day as the bulls pushed the price higher. The bears then stepped in sending the price through the recent trading range within a few trading sessions, thus completing the bull trap. The index dropped -3.7 percent in 14 trading sessions. The sellers have pushed the US market to a key support level and the bears appear to be in control in the US until a new monthly high can be established.

Bull Trap S&P ASX 200 (.AXJO)

Figure 3: Bull Trap – S&P ASX 200 (.AXJO)

The S&P ASX 200 recently broke to the upside to close at a 6-month high, then saw follow through buying the next day as the bulls pushed the price higher. The bears then stepped in sending the price through the recent trading range within a few trading sessions, completing the bull trap. The index dropped -4.0 percent in 11 trading sessions. The sellers have pushed the Aussie market to a key support level and there appears to be a battle between the bulls and the bears at these levels, but the Aussie market will likely take its the lead from China and the US near-term.

The Market Analyser – Platinum software offers Pre-Alerts, which are proprietary indicators that identify impulses in volume accompanied by a decline (D) in price. As shown in the accompanying charts these Pre-Alerts used in conjunction with the standard Bollinger Bands are very accurate in identifying bull traps.

Conclusion

Bull traps can develop in markets where there is panic buying or overconfidence, as the stock/index prices move into key resistance levels. The bulls are trapped because they are typically chasing the big moves in the market and are buying new highs as the price meets resistance. Once the market starts to fall, these new bulls try to extract themselves from the trap by selling. That selling pressure feeds back into the bear market and amplifies the subsequent move back to the downside.

The question of course is whether a given reversal is really a bull trap or a legitimate reversal to the upside. The way to trade these setups is rather than attempting to pre-empt the market by shorting or covering immediately, you should typically wait for the market to begin rolling over to the downside. Use the Market Analyser’s proprietary Pre-Alert Distribution Indicator to identify when a setup is imminent (refer to the sample charts for examples).

Sign up for a free 14 day trial of Market Analyser, and call our friendly Customer Care team on 1300 363 766 to get Pre-Alerts enabled!

A change in market momentum and sentiment appears to be underway and bull traps are not just an opportunity for swing traders looking for a trigger to trade the short side of the market. Bull traps are useful for longer term traders as a signal to apply some risk coverage to their long positions, either through hedging their positions or stepping to the sidelines.

By Micheal Hevern
Head of Research

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Stock Market Analysis: Weekly Market Wrap

Friday, November 5th, 2010

US Fed Sparks The Global Reflation Trade

Global shares, commodities and currencies (ex the US dollar) have all broken through key resistance levels this week as investors responded positively to the Fed’s announcement of a further $600 billion asset buying plan (QE2). The Aussie market has broken to 6-month highs after the RBA rate hike and the QE2 announcement, and the Aussie dollar is closing above parity. The Fed appears to have sparked a global reflation trade as a result of its commitment to QE2, especially in the near-term.

US Markets

US stocks surged higher this week. There is an old adage “never fight the Fed”, and this has proved true overnight as the Fed’s QE2 policy sparked a reflation trade around the globe at least in the near-term. US stocks rallied overnight in a delayed reaction to the Federal Reserve’s new massive stimulus package, with the Dow Jones index reaching levels unseen since the 2008 collapse of Lehman Brothers. The stock gains were across the board and commodities were boosted by the US dollar devaluation in the wake of the Fed’s QE2 decision. Key jobs data is out tonight, in the form of a monthly unemployment report and if this surprises to the upside the investors will have further confirmation of their bullish sentiment. The Dow closed by jumping 2.0% higher to 11,215, while in the broader market the S&P 500 index surged 1.9% at 1,221 and the tech-heavy Nasdaq ended up 1.5% at 2,577.

European Markets

European stocks followed the US higher for the week. Trading was again driven by news from the US, especially QE2. In London the Bank of England has left interest rates on hold at 0.5% with no change to its asset purchase program, while October house prices rose 1.8% as the UK government prepares for the biggest spending cuts since WWII. Miners led the gains in the FTSE.

In Germany the market rose to a 2-year high after the QE2 announcement and a report showing that European service and manufacturing industries expanded at a faster pace than initially estimated in October, led by surging output in Germany. The European Central Bank still intends to continue withdrawing its emergency stimulus measures in direct contrast to the Fed Reserve in the US.

In London, the FTSE 100 index closed up 2.0% at 5,863, the German DAX was up 1.8% at 6,735, while in France the CAC was up 1.9% at 3,915.

Asian Markets

Asian markets jumped higher this week, as investors approved of the US Federal Reserve’s monetary stimulus package. Mining stocks rose across the region due to expectations of the US dollar’s weakness and hence the further strength in commodity prices. Even Japanese stocks rose after some upbeat earnings. Equities, commodity prices and currencies all responded positively to the Fed’s announcement of a $600 billion asset buying plan (QE2). Emerging markets are set to experience inflation due to QE2 as the US dollars flow to emerging economies and commodities. Hong Kong shares are looking to close the week at 28-month highs. Hong Kong property firms led gains in the market due to the expectation of fund inflows from QE2. In China, miners and banks led gains and the market is looking to close the week above the resistance of the down-trend line that has been in place since 2009. Yesterday in China the SSE Composite closed up 1.9% at 3,087, while in Hong Kong the Hang Seng Index was up 1.6% at 24,536 and in Japan the Nikkei 225 Index was up 2.2% at 9,359.

Commodities

The US dollar continues to weaken after QE2 which is driving commodities prices higher near term. Copper is now at 2-year highs. Gold prices are again testing all-time highs and crude oil is trading at 6-month highs on the back of the reflation trade (QE2). We have analysed the status of commodities in this week’s Analyst’s Eye article.

Commodities surged overnight, with the benchmark crude NYMEX for December delivery up 2.1% (or $US1.80) to settle at $US86.61. Copper prices jumped to 2-year highs, with copper for December delivery up 3.4% (or 12.6 cents) at $US3.9095. Gold prices neared all-time highs again with December gold up 3.4% at $US1,392.10.

ASX News

The Aussie market is trading at 6-month highs on the back of the reaction to QE2. The RBA surprised economists by raising rates to 4.75% this week, but investors appear to be reading that as a signal of the strength of the Australian economy near-term. BHP helped push the market through its key resistance level, as the Canadian government rejected BHP’s $40 billion bid for Potash. In other M&A, the $8.3 billion takeover bid for ASX Limited by the Singapore Exchange is still experiencing stiff opposition from the regulatory and political ranks. Mining stocks will remain in focus due to the weakening US dollar and surging commodities prices.

Our View

The melt up continues, and now that the scope of the second round of stimulus (QE2) to jolt the US recovery has been quantified, investors are pushing stocks prices through key resistance levels around the globe. If the US can get some positive news about employment tonight, that will top off the positive momentum near-term.

The S&P ASX200 is currently trading around 4815 and has broken through resistance. The key levels on the ASX are now around 4900 and 4650. Investors again need to be nimble next week, as we have some positive momentum building which could set the tone for markets trading into Christmas.

By Michael Hevern
Head of Research

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Stock Market Analysis: Weekly Market Wrap

Friday, October 22nd, 2010

Weekly Market Wrap – US Dollar is in Focus

The Aussie market has been treading water this week but we are still constrained within the 4550 – 4700 trading range. The Aussie dollar reached parity but has backed off slightly since and commodities have backed off record levels.

Ahead of the G-20 meeting the US Treasury Secretary, Timothy Geithner, has said that the major currencies are “roughly in alignment now”, suggesting there is no need for further US dollar weakness. This will weigh on commodities prices near term, demonstrated by the pullback in the gold prices this week.

Overseas markets have generally traded higher this week on the back of the US Fed Reserve’s promise of a further round quantitative easing (QE2), better-than-expected corporate earnings, Chinese GDP data that showed that its economic growth remains robust, and the forecast of improving growth in Germany.

US Markets

US markets are trading near 2-year highs as investor sentiment continues to be buoyed by the prospect of a further round quantitative easing (QE2) and better-than-expected corporate earnings. The surprise Chinese rate hike initially triggered a sell-off, but upon reflection was seen as a sign of strength of the global economy from a number of blue chip companies. Financial sectors continue to underperform due to their regulatory issues and tech stocks continue to report well as corporates look to IT for productivity improvements in the jobless recovery.

The US dollar remains in focus this week and may be setting itself up for a turn in fortunes near-term, particularly following the comments from Mr Geithner. Overnight, the sectors supporting the markets included the Industrials (up 0.8%) and Consumer Discretionary (up 0.6%), while the Materials, Energy and Financial sectors ended flat for the session. The Dow closed up 0.4% at 11,147, while in the broader markets the S&P 500 index was up by 0.2% at 1,180 and the tech-heavy Nasdaq ended up 0.1% at 2,460.

European Markets

European stocks are finishing higher this week. Germany has reached fresh 52-week highs as the economy minister forecast that Germany could expect growth of 3.4 percent this year, rather than 1.4 percent as projected in April. The German economy is critical to the performance of the eurozone and has been driving the economic recovery out of the GFC.

In London the minutes of the BoE rate meeting showed that some policy makers saw an increasing likelihood that further monetary easing will be needed. This allowed the market to recover from early losses.

The euro is still hovering around 8-month highs at $US1.40. Overnight in London the FTSE 100 index closed up 0.5% at 5,758, the German DAX was up 1.3% at 6,611, and in France the CAC was up 1.3% at 3,877.

Asian Markets

Asian markets ended the week mixed. The key drivers for Asia came out of China this week as the market reached fresh 6-month highs. The news began with a surprise quarter-point interest rate hike by the Chinese central bank (the first increase since December 2007), which initially triggered a sell-off in equities and weighed on risk assets globally with fears that the world’s fastest growing economy could dampen global growth. Upon reflection investor sentiment turned, suggesting that the rate hike indicated a strong Chinese economy.

Yesterday Chinese stocks declined after data showed the Chinese economic growth slowed moderately in the third quarter as inflation rose, with the 3Q GDP rising 9.6% (but down from 10.3% from the previous quarter) and CPI rising to 3.6% – the highest level in 23 months. The data supported the surprise rate hike by the Chinese government as it continued to withdraw stimulus and took measures to cool sectors such as the property market. Banks and brokerage houses led losses in China as investors took profit.

Tokyo stocks continued to fall, led by exporters and currency-sensitive stocks that are being hurt by the yen being at 15-year highs.

Yesterday in China the SSE Composite closed down -0.7% at 2,984, while in Hong Kong the Hang Seng Index was up 0.4% at 23,649 and in Japan the Nikkei 225 Index was down -0.1% at 9,376.

Commodities

The lower US dollar will drive base metals prices near term. The comments from the US Treasury Secretary suggesting there is no need for further US dollar weakness will no doubt play out next week. Gold has given back 2 weeks of gains as it retraced from the record levels of $US1,384 last week. The Fed’s QE2 is yet to be implemented, the next FOMC meeting is on 3 November.

Overnight, commodities were lower due to the stronger US dollar. Benchmark crude NYMEX for December delivery was down -2.3% to settle at $US80.67. Copper prices fell as Copper for December delivery was down -0.3% at $US3.7755. Gold prices backed-off record highs, with December gold down -1.5% at $US1,323.20.

ASX News

The Aussie market has been trading sideways this week and is still constrained within the trading range between 4550 and 4700. The big story for the week was the Aussie dollar’s parity with the US dollar, closely followed by James Packer’s corporate raid on Ten Network (he now holds an 18 percent stake). The Aussie dollar has backed off its highs and the gold price has been sold off this week. BHP remains committed to its hostile takeover of Canada’s Potash Corp, and investors and banks are watching the RBA for comments relating to interest rates ahead of their November meeting (Melbourne Cup Day).

Our View

Overseas markets continue to perform well with the US nearing 2-year highs, Germany at 52-week highs and China at 6-month highs. Commodities prices have backed off record levels, led by gold. The ASX may suffer if the US Treasury Secretary has his way with stemming the US dollar weakness, which could hurt commodities prices and in turn our mining stocks. Investors should monitor the US dollar’s performance as a leading indicator for a change in sentiment near term.

The S&P ASX200 is currently trading around 4620 and is near the middle of its current trading range. The key levels on the ASX are still around 4720 and 4,550. China, QE2 and the US dollar will be key for next week’s performance.

By Michael Hevern
Head of Research

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Stock Market Analysis: Weekly Market Wrap

Friday, October 1st, 2010

Weekly Market Wrap – Best September For Decades

The markets have seen profit-taking in the past couple of sessions as investors rule off a profitable quarter after a spectacular performance in September. Commodities were again in focus, primarily driven by the US dollar index trading at 8-month lows which pushed copper to fresh 5-month highs and gold to record prices above the key $US1,300 level and even crude oil joined in on the party. European markets cooled off this week as investor concerns over the financial health of European banks and civil unrest across Europe over austerity measures, dented investor sentiment. Asian stock markets are trading mixed with Japan succumbing to the strong yen again, and China mixed for the week. Expect to see profit-taking on our markets in the near term as the ASX market was up 5% for the month and up 8.3% for the quarter. We have detailed below the monthly and quarterly performances of the major market indices.

US Markets

U.S. markets have had the strongest September since 1939, and the best monthly performance since October 2002 , as the fears of the dreaded “double dip” have abated. Investors expectations that the U.S. Federal Reserve is prepared to pull the trigger on additional stimulus measures as necessary, has helped the market this week. The Dow Jones is now up 3.5% year to date (YTD). History is on the investors side, as over the past 68 years the Dow continues to rise 71% of the time once the measure is in the black, in the first three quarters of the year (according to the Dow Jones Newswires). Overnight the Dow closed was down -0.4% at 10,788 (up 7.7% for month, up 10.4% for quarter), while in the broader market the S&P 500 index was down -0.3% at 1,141 (up 8.8% for month, up 10.9% for quarter) and the tech-heavy Nasdaq ended down -0.3% at 2,369 (up 11.7% for month, up 12.3% for quarter). Tonight the Institute for Supply Management (ISM) report on manufacturing activity should give a further indication as to whether the recovery is sustainable with business manufacturing activity being a key driver of the current economic recovery.

European Markets

European stocks drifted sideways this week on rising concerns over sovereign-debt issues in Europe. Concerns over European banks and Ireland weighed on the markets and the civil unrest which had hundreds and thousands of workers across Europe protesting government spending cuts, was also a concern. Debt concerns resurfaced as the Moody’s ratings agency downgraded Spain’s sovereign rating to Aa1 (from Aaa), and a report came out that the Irish government’s budget deficit will rise to 32% of its GDP this year. In the U.K. the IMF has cuts its 2011 economic growth forecasts which also weighed on the markets. Over the quarter the U.K. has outperformed Germany, which has been range trading since January. Overnight in London, the FTSE 100 index closed down -0.4% at 5,549 (up 6.7% for month, up 12.9% for quarter), the German DAX closed down -0.3% at 6,229 (up 5.4% for month, up 4.4% for quarter), while in France the CAC was down -0.6% at 3,715 (up 6.5% for month, up 4.1% for quarter).

Asian Markets

Asian stock markets are trading mixed this week. A better-than-expected business sentiment figure in the BoJ’s quarterly Tankan survey was not enough to over come their worries over the strong yen. In China, the Purchasing Managers Index (PMI) which is a gauge of nationwide manufacturing activity, rose to a 5-month high reading of 52.9 in September. This pushed Chinese shares higher but their market is still trapped in a trading range. For the quarter, the Hong Kong market has been outperforming. Overnight, in China the SSE Composite closed up 1.7% at 2,656 (up 0.1% for month, up 10.7% for quarter), while in Hong Kong the Hang Seng Index was down marginally -0.1% at 22,358 (up 7.8% for month, up 11.1% for quarter) and in Japan the Nikkei 225 Index was down -2.0% at 9,369 (up 2.4% for month, down -0.1% for quarter).

Commodities

Base metals have been trading higher on expectations of tightening fundamentals and the lower US Dollar. Investor focus is on the fundamentals, with concerns about supply constraints for several of the base metals driving demand. Copper climbed to fresh 5-month highs, Gold is above all-time highs. Overnight the benchmark crude NYMEX for September delivery was up 2.7% to settle at $US79.77 (up 7.7% for month, up 5.8% for quarter). Copper prices rose again this week, overnight Copper for September delivery Copper for September delivery was down -0.3% at $US3.6535 (up 7.8% for month, up 24.4% for quarter). Gold prices are around record highs, above the key $US1,300 level, overnight December gold was down marginally -0.1% at $US1,308.10 (up 5.8% for month, up 5.0% for quarter).

ASX News

The ASX market was sold off after making a new 4-month high this week as traders and investors squared up for the end of month/quarter. Investors are choosing to be cautious as we now trade into the seasonally weak month of October and ahead of the long weekend for NSW. Federal parliament resumed this week without too much drama, but it is clear that it will be difficult to obtain consensus given the small majority that the government has. Next week the RBA decides on interest rates and at this stage the consensus is for a rate hike, and Aussie banks are saying that they will pass on any rate rise immediately. The ASX 200 is still trading around 4600, having briefly tested 4700, and the index is up 4.3% for month and also up 6.9% for the quarter.

Our View

Markets have surged this month but they are trading at key resistance levels. Investors are choosing to be cautious as we trade into the seasonally weak month of October and ahead of the long weekend in NSW. The markets appear to be losing some momentum after having a record breaking September. Investors should take this opportunity to protect their portfolios as we move close to the seasonally weak time for the markets.

The S&P ASX200 is currently trading at 4605 and is near the top of its current trading range. The key level on the ASX which is still around 4,600 and the key levels for our index next week are 4650 and 4450, with pivot around 4550. The momentum is starting to falter, as investors are erring on the side of caution near term. Options volatility is still subdued at the moment which gives investors access to “cheap” protection, so investors may consider taking this opportunity to protect their portfolios.

By Michael Hevern
Head of Research

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Stock Market Analysis: Weekly Market Wrap

Friday, September 10th, 2010

Weekly Market Wrap

Equities markets started the week lower on concerns over the EU debt, but the September rally has resumed. Better-than-expected employment and trade data supported the market moves higher, and gold reached all-time new highs (but has slowly backed off). The concerns over the robustness of the EU bank “stress tests” continue to simmer under the surface, and in Australia the better-than-expected jobs report should support our market.

US Markets

US stocks have extended their gains this week following better-than-expected jobs and trade data. Gold prices have backed off all-time highs as investors seek more risk in their portfolio as fears of the dreaded double-dip recession abate.

Economic news is suggesting that the US economy will continue to grow slowly for the rest of the year. The trade deficit narrowed in July as exports rose and imports fell. The Dow closed up 0.3% at 10,415, while in the broader market the S&P 500 index was up 0.5% at 1,104 and the tech-heavy Nasdaq ended up 0.3% at 2,236.

European Markets

European stock markets have been mixed this week as EU debt concerns resurfaced. Banks sold off as EU regulators met in Basel to finalise new global rules on capital requirements, after reports that the region’s recent “stress tests” underestimated some lenders’ holdings of government debt. The Federal Association of German Banks had estimated that Germany’s ten largest lenders may need as much as EUR105 billion of extra capital under the planned Basel rules. Trading volume remained light.

The austerity measures that have been implemented by European governments are starting to bite, and a number of countries are experiencing transportation strikes in protest. Overnight in London the FTSE 100 index closed up 1.2% at 5,494, the German DAX was up 0.9% at 6,221, and in France the CAC was up 1.2% at 3722.

Asian Markets

Asian stocks have been mixed. Japanese share prices are being weighed down by the yen’s rise to a fresh 15-year high against the US dollar, sparking further fears for export company profits. Chinese shares prices have been flat as the government stands firm on access to credit. China will be reporting on August trade data this week.

Overnight in China the SSE Composite closed down -1.4% at 2,656, while in Hong Kong the Hang Seng Index was up 0.4% at 21,167 and in Japan the Nikkei 225 Index was up 0.8% at 9,098.

Commodities

Wheat prices are again trading around 2-year highs. Gold backed off record highs, while oil prices traded around $US74 again. Overnight the benchmark crude NYMEX for September delivery was down 0.8% to settle at $US74.05. Copper prices are lower, with September delivery down 2.1% at $3.4185. Gold prices are around 2-month highs, around the key $US1,250 level, with December gold down -0.9% at $US 1,244.60.

ASX News

With little fanfare the ASX market has accepted the news that the minority Labor government is now in place. Yesterday’s news of the better-than-expected unemployment report which showed that the unemployment rate fell from 5.3% to 5.1%, adds to the growing body of evidence that the Aussie economy continues to outperform.

The gold mining sector has been hot as M&A activity within this segment of the markets builds on the back of the gold prices reaching all-time highs, though it has since backed off these levels.

Our View

The ASX market is trading at a key resistance level around 4600. The EU sovereign debt concerns are resurfacing as a problem in Europe, with investors questioning the robustness of the EU bank “stress tests”, and reports that EU banks may need to raise further capital to strengthen their balance sheets.

The S&P ASX200 is currently trading around the key resistance level at 4600, at the top of its current trading range.

The key levels for our index next week are 4700 and 4450, with the pivot at 4550. Consolidation continues but our markets will likely be directed by overseas market movements, particularly if EU debt issues resurface. Remember that historically in mid-September through to mid-October it is a seasonal weak time for the ASX market. Volatility is low so it is cheap to protect your portfolio at this time.

By Michael Hevern
Head of Research

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Analysts Eye

Friday, March 12th, 2010

Plenty to Smile About

Investors have plenty to smile about as the reporting season winds down.

This week was the anniversary of the market turnaround from the worst destruction of shareholder wealth in living memory. In Australia we have seen our market up 55% on the ASX200 from its March lows. Overseas market turnarounds have been even more impressive with the Unites States seeing the S&P 500 up 70% and the NASDAQ up a staggering 75% while in the UK and Europe, markets are up around 60%. China has seen its market recover over 80% from its market lows.

The recent reporting season has given us pause for thought, with 7% of companies outperforming, 8% underperforming forecasts and the remaining 85% reporting inline (according to Credit Suisse). One key measure of corporate performance is the debt to equity ratio (D/E) and this has seen an impressive turnaround with the market average now 23% compared to over 30% in the previous corresponding period.

A raft of capital raisings to the tune of $100 billion in the past year has offered support to corporate balance sheets; however this has come at the cost of the dilution of shareholder equity. Earnings have fallen 13.7% due to this dilution (according to Macquarie). Corporates have been keen to hold on to cash, as evidenced by dividend payouts falling around 6% (according to JBWere) however this is a significant turnaround from the previous corresponding period where there were cuts to dividends of 22%.

It pays to be vigilant during the reporting season as traders can attest in the recent company performances. Those stocks that reported outperformance have in turn outperformed the share market benchmark by around 8.5% and on the flip side the underperformers have underperformed the index by 8.4%.

A quick synopsis of the results saw:

- Big four banks – upside surprise with the bad debt provisions falling more than expected, the sector is still a key driver for performance on the ASX.

- Insurers – were a mixed bag. Generally margins improved significantly, but Suncorps banking arm disappointed and QBE missed forecasts.

- Miners – profits were hit by a rising Aussie dollar and falling commodity prices over the reporting period. However the focus is still firmly on the strong Chinese and Indian demand which continues to underpin the outperformance of the materials sector in the ASX. Capital expenditure (Capex) will remain subdued for the remainder of the year, as miners still focus on cost cutting.

- Misses – those that disappointed saw their share price punished as was evidenced by: Gunns (GNS), Toll (TOL), Worley (WOR) and QBE.

What Now?

Brokers estimate in the 2010 forecast that earnings will rise for 6% and looking into the crystal ball, earnings are forecast to continue to rise in subsequent years, 27% in 2011 and 15% in 2012. If these forecasts hold true then they will underpin continuing recovery in the share market performance. 2010 dividend growth will lag earnings growth as corporates continue to place a high emphasis on the health of their balance sheet, this will impact those investors chasing yield.

Tempering these forecasts is the RBA’s determination to restore interest rates to normal (around 4.5% to 4.75%). This will mean that interest rates will no longer be benign and will start to actively drag on corporate EPS.

China is still outperforming world economies and so long as this continues our share market should continue to be in high demand.

Michael Hevern
Head of Research

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