Moffs Market Mood Weekly Note Tuesday 22 September 2009

MARKET COMMENTS

Bearish Divergence Emerging in Asia – 1/9/09

Below is an extract from today’s The Daily Reckoning Australia, free subscriptions are found at http://www.dailyreckoning.com.au/. It gives a good overview of where I think where at in this intriguing market. I have nothing else to add this week; the markets look ready for a breather & September is a notoriously BAD month…

Click to enlarge

Market Mood: 4 /10 – Concerned

“From Dan Denning in St. Kilda (for The daily Reckoning):

Mini Correction Not Enough – 26/8/09

Mini Correction Not Enough – 26/8/09

After beginning to aggressively call for a retracement/correction early last week, on Friday the All Ords finally showed signs of cracking; falling to our first identified support zone @ 4250. Top to bottom this was a fall of 5.1%.

I don’t think we can hang our hats up and with confidence & say that the inevitable correction is over. The primary up swing since March has lasted 174 days to date and has seen the All Ords rally 44.8%. A typical correction should shed 20% off the previous primary move. Last weeks late retracement fails to meet this criterion. In summary; I’m going with the flow, without conviction. Dancing closer & closer to the exit.

This week the reporting season reaches its climax (finally). It has all unfolded in a very orderly fashion; “most management outlook guidance has been cautiously optimistic, and at worst outlook is expected to be “challenging”. These results support the ‘sustained recovery theme’ and bode well for the longer-term market outlook” – nothing new here. There have been comments out of the press today suggesting companies have been using the GFC as an excuse to hide underlying fundamental problems… doesn’t surprise me.

Too Far, Too Fast; Correction Underway – 17/8/09

Since the intraday low at 3710 on 8 July, the All Ords rallied over 20% during the following five weeks. That’s a return of nearly twice the long-term annual average stockmarket return in less than six weeks… markets are fascinating beasts.

Over the last few days you could feel the momentum turning, the bulls have quietened down and moved onto the back foot, while pessimistic views (pleasantly humbled over the last 5 months) are beginning to appear again (from many sources: news wires, MINC’s morning meeting, market commentators, and our illustrious economic leaders). There is now a general consensus out there that the market has over-shot, rallying to far & fast ahead of the real economy.

Market Finds Resistance around 4330 – 12/8/09

In the last 8 days the market has hit a wall, but it certainly won’t sit down, oscillating between 4280 & 4330; the latter being a pretty clear resistance level on the All Ords.

I have nothing of any real significance to add on last week. The markets remain heavily overbought, with more bearish divergences appearing every day in both domestic and overseas markets. Adding cash positions by selling overbought stocks & taking trading profits remains a prudent tact. Remain focused on ‘special situation’ trade ideas.

Short & Caught (thankfully not) – 4/8/09

I don’t think I’m alone when I say this market has caught me by surprise. In fact I think it has caught a lot of people completely off-guard, and a few have been caught short. The acronym quoted by Southern Cross’ Charlie Aitken – FOMO (Fear Of Missing Out) is certainly the dominant emotion right now, as investors are rushing to get on the gravy train…. a funny thing the fear-greed cycle…. considering investors were jumping all over each other to find the exit only 6-9 months ago. Now we’re 40% higher and all anyone wants to do is buy, Buy, BUY!!! Reality Check!!!

Even the big-boys are getting FOMO fever (it’s spreading faster than Swine), with Citigroup and Goldmans in the last week upgrading basically all the ‘big 4’ banks, most to a “BUY” recco. I find it fascinating the market still hangs on their every word, apparently nobody remembers that these are the same analysts/firms that were recommending only a “HOLD” or a full fledged “SELL” 30-40% lower…

“Bull Run” Continues…. – 28/7/09

I was certainly a little premature (not necessarily incorrect) last Tuesday when I started alluded to a broader market pullback…. since, the All Ords has rallied another 3%, with some very impressive gains seen among the cyclicals and small caps. The current rally is now 20 days old and has seen our market rise 11%; annualised you’re looking at a completely unrealistic 180%.

The S&P500 (our global market proxy) has a RSI (relative strength index) of 94.6, remember; a reading above 70 is considered ‘overbought’, and this index is maxed out at 100. A reading this high is an exceptionally uncommon occurrence; since 1980 the S&P500’s RSI has been above 94 six times; 1 time the market continued to rally (1987 pre crash), 1 time the market drifted sideways (2004), 2 times we got a minor retracement (1991 & 1992) and 2 times their was a large correction (1990 & 2001). What does this all mean… I’m not really sure… food for thought.

96% sure stella run is about to end (for now) – 21/7/09

Based on some trade data I found this morning (from 1926-1985) and assuming we are in the beginning of a bull market (and no longer a bear market), the probability of the Dow Jones moving higher again tonight (for the seventh session in a row) is 3.7%. Looking at it from another angle; the probability of the DOW correcting tonight is 96.3%. Considering most major markets are now sitting slightly below major resistance, have overbought RSI’s,  Bernanke is giving a speech to congress tonight that could easily spook the market, and that the All Ords is giving a ‘key reversal’ in late trade today, I’m putting my money on a short-term correction.

If you’re interested in playing a short-term fall in the market, a few of the cyclicals and financials look vulnerable: MCC, OST, CBA, BEN, NAB, LEI, WES. NOTE: only for very short-term speculation/hedging.

Correction Over? – 15/7/09

Moff’s Market Mood – 03/07/2009

This seems to be a market poised on the edge, ready to break up or down. I still have no conviction either way… and find the ambivalence quite unnerving.

 On the negative foot:

- unemployment in the US and Euro zone continues to rise (9.5% in both the US & Euro),

- most of the big brokers are now holding ‘comfortable-to-confident’ market views; and are pushing the ‘sustained recovery’ theme – this makes me very wary. When everyone is doing the same thing, markets will adjust….

- markets never go up in a straight line. And bear markets almost always end with some sort of retest of the previous lows,

- the economic news coming out of the USA is being viewed by market commentators as “positive”, but really it is only “less negative”. Consensus estimates for USA 2Q09 GDP growth is now -1.6%, this is still a nasty number. Yet, the trend is reversing (from -5.7% 1Q09), so its hard to get too bearish.

Correction Prompts Nasty Déjà-Vu – 25/6/09

GOLD: The tables have turned again, both NCM and LGL are sitting close to their major support levels ($28 and $2.80 respectively), teetering closer to the edge… The office gold bull/bug hasn’t folded yet, but the nerves are building. Gold priced in $A continues to retreat, now 25% off the highs. The argument for gold was questioned further Tuesday night, when foreign bank demand in the large US Treasury Bond sale came in at the highest level in years (demand was over 3 times the amount of notes sold). Foreign Demand for Treasury Notes = Demand for $USD… throwing more water over the bullish gold scenario.

MEL looks a little ugly, breaking through the floor of the ‘ascending triangle’ that had been developing since the beginning of this year. This was pretty disappointing, but the trade note was made around $0.48, so losses from traders exiting should be minimal (last $0.505). I’m still of the view this is a good spec investment, so risk tolerant investors should hold on for the ride.

Moffs Market Mood – BUY AIO 19/6/09

Everyone should have received our BUY note on AIO (if not, email me on tmoffatt@hcsecurities.com.au). I’m a big fan of this call, one for both traders and/or investors.

Over the last week markets have been rotating out of cyclicals back into defensives. The opposite trend to what we have experienced over the past 2 months. As a result the banks, TLS, CSL, consumer staples & beverages have outperformed, while materials, energy & industrials have lagged. I’m not holding any strong directional market views at the moment. The recent retracement hasn’t breached any major support zones, so I remain unconcerned… for now…

The TLS BUY recco (see weekly note: 28 May 09 – “ANZ Goes To Market”) is unfolding well; the stock rallied as high as $3.46, getting close to $3.60 our target zone, before correcting back to $3.30 on overbought short-term technicals. Traded a few July puts on the way down, closing out late Thursday arvo >>> Why close out: 1) expect support to come back into the stock between $3.25-$3.30, & 2) TLS is making all the right signals (technical & fundamental) that a sustained turnaround is occurring. Consider going long again around $3.25.

Moff’s Market Mood – Gold & FMG

Mr Nick Worrall (another of the good looking dealers down here at HC Securities), aka ‘Wobbles’ and I have been having an across the desk battle over the direction of GOLD for a while now. Worrall is a through and through gold bug…. After giving him heaps throughout March & April (as the gold price looked sure to be making a long-term “double top”) the last few weeks have been pretty painful (gold has rallied almost all the way to its previous highs of US$1000/oz). I am quite aware of the potential upside on gold from a fundamental perspective – unsustainable US public & private debt, raging US printing presses, exceptionally loose monetary and fiscal policy globally – did someone say devaluation of the USD and chronic inflation). Yet, the technicals still aren’t aligning to the bullish fundamental view. Look at the “dark clouds” (opens on the high and closes on the low), “key reversals” (opens low, rallies intra day making a new high, then falls and closes down) and downside MACD crossover on the chart below….

Moffs Market Mood – Market Breaks Key Resistance, RIO / Chinalco Fails

The All Ords and S&P 500 both broke out to the upside through their 200 day moving averages earlier this week. This is about as good an indicator as any signalling that the primary downtrend (and pain of 2008) is over. NOTE: It certainly doesn’t mean that we are now in a “Bull Market”….. and caution is still warranted.

Talk emerged overnight that the RIO / Chinalco deal has fallen over. Surprise surprise. RIO is in a trading halt, after saying it is “pursuing a range of options” to deal with its USD $38b of debt.….. Keep and very sharp eye on this one. If they do a deeply discounted massive placement this could be the large cap BUY of the year. Although not quite as good as the 2008 buy of the year – BHP @ $20. Anything south of $45 (>33% discount to the last traded price) would be ideal. Lets see how it unfolds, it’s a little early to call without all the key details.

Moff’s Market Mood – ANZ Goes To Market

Good Arvo,

Wednesday ANZ announced a $2.5b institutional equity placement, and a $350m share purchase plan, all @ $14.40 per share (a 7.5% discount to the last traded price – $15.57). After talking about switching part of your banking allocation into ANZ last week to benefit from a discounted raising, it was a little disappointing that existing shareholders will only get is an opportunity to participate in a poorly discounted SPP.

But still, we’ll take what we can get; 7.5% on $15k (the maximum SPP allocation) is still a $1,125 profit. I have to give the company credit, getting away such a large raising, at a such a low discount (relative to recent placements) is a pretty good effort. Apparently the placement was 3x oversubscribed (our bids to participate in the placement were scaled back 90% ! ! !), demonstrating how underweight the major institutions are in the banking sector. ANZ now looks like an investment buy, although I’d hold out for entry in the $14’s. The business is relatively poor quality (against WBC & CBA), but the multiple discount suggests value, especially now their tier 1 capital ratio is improved and aligned with WBC & CBA.