Monthly Archives: July 2013

How stable are world markets?

Markets continue to go to record highs based not on economic growth but on quantitative easing by central banks. The question is how sustainable is this trend?

If we consider the charts of the major indices such as the DOW, DAX and even the FTSE, there is no technical reason to consider a market reversal. Other market indices are also useful. For example consider the one year chart of the VIX below. The VIX is an indicator of market sentiment and it is currently at an all time low suggesting that investors are confident that a market reversal is unlikely.
Vix jepg
Another index of world economic health is the BDI. The Baltic dry index below, is a sensitive measure of the health of world trade. The fact that the BDI is currently at its highest point in over a year suggests that world trade is improving. Admittedly this is coming off… Continue reading

Could the 5000 level again inhibit the ASX200?

The Australian share market has had a strong run over the past year although it continues to lag well behind many major markets which in a number of cases are at their all time highs.

The chart below shows the ASX200. The Australian index is noted for its reaction to the 50% retracement which often provides an area of resistance and a point of reversal for the market. The horizontal red line is the 50% retracement from the November 2007 high to the market low of March 2009.
XJO 130722
This region has provided significant resistance for the index and was the trigger for reversal on several occasions during 2010 and 2011. Only more recently in 2013 did the market move for a brief time through this region of resistance. Since May 2013 the market has been in correction, only to retrace to the 5000 region to again and stop at this… Continue reading

Will the Australian market go higher?

As investors we always need to be alert to the possible future movements in the market index. There are many factors which influence our market, the important ones being overseas economies and markets and the Australian economy.

While the American markets influence our share market, it is the Shanghai Composite index as a sensitive measure of the health of the Chinese economy which is now more important. The weekly chart of the Shanghai Composite is shown below and it is evident that this index has been in a long term downtrend since its high in late 2007. Australian investors are very aware that we are very dependent on the Chinese economy and with the Shanghai composite at its lowest level in 4 years and very close to the low of the GFC; this provides a negative lead for the longer term direction of the Australian market.
Does the economic outlook… Continue reading

The Bernanke bubble and a correction is due.

World equity markets are in a bull market phase which is based upon monetary easing by central banks and not on economic growth. The world markets are now at the bubble stage. There is little question that markets are overdue for a correction and Mr. Bernanke is creating the conditions for a significant market reversal.

Mr. Bernanke’s recent announcements show just how deeply dependent the financial markets have become on monetary easing. Even the suggestion that that the Fed might taper off quantitative easing was sufficient to cause an immediate 5% correction. What we saw was a glimpse of how financial markets will react to a world without quantitative easing: and it is not pretty.

It has now come to the point where what the Federal Reserve does or fails to do is the only thing that matters for stock market investors. The recent market response to a mere suggestion… Continue reading

World growth and the European Union

World growth continues to decline. The IMF recently lowered its growth projections for this year in America, the Euro zone, China, Brazil, Russia and India. Despite the apparent improvement in the US economy, Europe remains the big concern, notwithstanding the issues in China.

The facts are that Europe’s financial system is in bad shape and little seems to be happening which is likely to improve it. The euro-zone economy has contracted for six consecutive quarters. The IMF expects growth in the EZ to contract by 0.6% this year. The outlook for the European Zone is exacerbated in part due to the continuing slowdown in China. There are problems across many European Union countries with debt and deficits out of control and most having a very limited potential to trade their way out of their problems.

France under a socialist government has continued to deteriorate. It has recently lost its top… Continue reading

Using RSI to buy oversold stocks.

Many small cap stocks have been heavily discounted over the past year compared to the big cap stocks, despite having good dividends and strong fundamentals. This applies particularly to stocks in the mining services sector. The question is when is the right time to buy an apparently good stock where the price continues to fall?

Take the example of Mineral resources (MIN), a mining services company which operates in two segments: mining services and processing and whose share price has been savaged along with all stocks in its sector. Fundamentally MIN is strong with a ROE 30%, Debt/Equity 36%, dividend of 5.2% and an increasing revenue and dividend stream. But the problem is that stocks such as MIN continue in a downtrend due to negative sentiment despite the real investment opportunity with some of these stocks.

So when should these stocks be bought, where the fundamentals are strong but the… Continue reading

Mining services companies have been over-sold

Mining services stocks have been over-sold by the market and with quite a few mining services companies competing for a diminishing number of opportunities in a contracting resource industry, it is understandable. But the extent of the selling has been overdone. Particular mining services stocks which do have very good fundamentals but have been slaughtered by the market include NRW Holdings, Ausdrill, Imdex and Fleetwood.

The diversified stock NRW Holdings (NWH) is a case in point. This stock has an ROE of 37%, very low debt, great cash flow, a rising plane of earnings and dividends, and a grossed up yield of 26%. The share price of NWH has fallen from a price of about $4.20 to 84 cents in a little more than a year as shown in the weekly chart of NWH below.
While the value investors have been quite appropriately talking this stock up for the past… Continue reading

Bonds and equities

Bernanke’s speech last week was not positive for equities and there has since been a surge in bond yields in the US with 30 year bonds now returning about 3.5%. These higher long term bond rates usually create a real problem for US equities when thirty year bonds are cheaper than equities which may provide not only a higher yield but a lower risk. The last time that this happened, equities were sold to purchase bonds and there was a volatile period for equities. Perhaps the current volatility can be explained on this basis.

In monitoring Australian bond prices, I have noted a similar trend over the past week with some very respectable yields now on offer. For example some long dated inflation linked bonds are yielding 7.25%. Clearly this is less attractive than a fully franked 7.25% yield from an Australian bank or Telstra but the capital risk with… Continue reading

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