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.



• 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



• 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.



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.



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.



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



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.

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Edition 1 - Chartered 16th March 2010