Rudi On Thursday

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

This story was originally published on Wednesday, February 18, 2009. It has now been republished to make it available to non-paying members at FNArena and readers elsewhere).

After firing several warning shots over the past two weeks, time has finally arrived to warn you all it appears increasingly likely that a new downward leg for global share markets has begun this week.

As it turns out, my conclusion on Monday that BHP Billiton ((BHP)) shares at $34 and Commonwealth Bank ((CBA)) shares at $30 meant the two leading stocks for the two dominant sectors in the Australian sharemarket were pushing and stretching valuation limits has turned out the ultimate give-away. And thus shares are in retreat on Wednesday for the third day this week.

In my previous editorial, exactly one week ago, I made the following observation:

“I have a suspicion that too many investors have interpreted [the gradual lift in prices for commodities] as a sign that the next upturn is commencing right here and now. If so, I cannot but think they have set themselves up for disappointment.

“Sooner or later the economic realities will hit home. As I don’t have a crystal ball, I cannot say when exactly this is going to happen, or what will cause it, but it seems only logical to assume that present investor optimism will have to endure some serious tests in the coming weeks.”

These tests have come in the form of continued worsening economic data, not only from the US, but also from China, Europe, Russia, Japan and Australia (and from practically everywhere else around the globe). Ultimately, investors have once again come to realise the global economy is still worsening, global trade volumes are still falling, and the optimism that had crept into global markets in February is likely to prove too much too soon.

It is only logical to assume now that any potential recovery for economies lies further into the future than the (much hoped for) second quarter of this year. Estimates for corporate profits will need to be cut further. It shouldn’t surprise anyone prices for commodities, with the exception of the safe-haven precious metals, have come under renewed pressure as well.

It appears previous lows will be revisited, and new lows are looking increasingly likely. Various share indices are only one or two negative sessions away from potentially sinking below the lows seen in November (or in Australia’s case: last month). Meanwhile, overall investor sentiment is looking increasingly fragile.

Things have rapidly deteriorated over the past few days.

Not only did the broader S&P500 index in the US close below 800 last night (widely regarded as a psychologically important support level), but one of the oldest market analyses – the so-called Dow Theory – is pointing to a resumption of the downward bear market trend. According to this theory,  if the averages for the Transportation sector and the Industrials stocks confirm one another on a closing basis, the broader equity market will return to trend.

Last night, the Transports made a new bear market low, hence a closing break of 7,543 in the Industrials is needed to confirm the weakness in the Transports and generate a Dow Theory sell signal. As I stated above: this could easily be just one more negative session on Wall Street away.

If you accept that crude oil is still a very good barometer for global economic health, and thus for the direction of equity markets, then renewed severe price weakness these past few days (even with OPEC flagging more production cuts ahead) is simply another ominous sign. Add the fact that indices for commodities have now been falling without interruption for 6-7 days, with copper sinking back below US$1.50/lb last night (the metal closed at US$1.42 in New York) plus fierce strength for the US dollar and US Treasuries, and a picture is emerging of another spike in global risk aversion.

Also, the ease with which gold has surged through two technical resistance levels in a few days only…, is maybe the real indicator for what is happening in the markets.

Commentators elsewhere will point at technical resistance levels (around 3540 for the S&P200 in Australia) that proved too strong for the time being; or that authorities in the US have failed in their attempt to calm investor fears; or that restocking by traders in China gave investors a false impression growth and thus demand for commodities was about to pick up; or that the world has finally realised the debt situation in Europe may turn out much worse than in the US.

I’d say it will turn out a combination of all of the above, plus some more, within the context I painted over the past two weeks: valuations for popular (leading) stocks had gotten out of hand. As it turns out, the market had no appetite for other stocks and allow these to narrow the gap with the leaders. Investors reasoned stocks like BHP and CommBank are the leaders for a reason. If these stocks cannot move higher, why should the rest?

To complete this picture, regular contributor to the FNArena Technicals section, Charlie Chartchecker, sent me a few charts regarding the All Ordinaries index on Monday, suggesting the market had yet arrived at another make-or-break point with his proprietary Bears Strength Indicator on the cusp of either breaking out to the upside (negative for the share market) or to the downside (a positive for the share market).

With the share market now down three days in a row, I think we can safely assume Charlie’s indicator is breaking out to the upside, hence the direction for equities will be down. Or as Charlie would put it: the bears are getting stronger and they are increasingly taking control.

Don’t be surprised if markets don’t go down in one go though.

With these thoughts I leave you all this week,

(I have added a few extra messages to this week’s editorial – see below)

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always, firmly supported by the Ab Fab team of Greg, Grahame, Chris, George, Joyce, Andrew and Pat)

Special announcements from FNArena:

FNArena editor Rudi Filapek-Vandyck will be sharing his views and analyses through live presentations in Adelaide and Surfers Paradise. In addition, FNArena is launching an “Introduction to the Stock Market” course for beginners.

Subscribers and non-paying members have the chance to meet FNArena editor Rudi Filapek-Vandyck in Adelaide early next month or in Surfers Paradise in late July. On invitation of the Australian Investors Association, Rudi will give a presentation titled “what have we learnt from the results season”? in Adelaide on March 2nd.

Those living in Western Australia who want to grab the opportunity to attend this presentation and meet Rudi live should travel to Enterprise House, 136 Greenhill Road, Unley (7 minutes from the centre of Adelaide) on Monday, March 2nd. The presentation starts at 7pm and can be attended if you are currently not a member of the AIA. Cost of entry is $5 per person.

In addition, your editor will also present at the AIA National Investors Conference – Markets 2009 – Strategies & Opportunities – from 26 to 29 July at the Surfers Paradise Marriott Resort. Title of the session is: “Opportunities in the Australian Sharemarket?”

For more information about this event (including purchasing your ticket) visit: http://www.investors.asn.au/G700GoldConf.asp
Last but not least, FNArena has teamed up with an experienced team of share market educators. The team, led by Tricom Equities Advisor Tracy Rowney, is responsible for “Introduction to the Stockmarket” courses for TAFE Queensland.

FNArena and Tracey’s team are now offering access to a similar high quality beginners introduction to the Australian share market from the luxury of your own home internet connection. Courses take six weeks to complete, and require your participation every Wednesday evening, starting 4th March 2009.      Cost: $900.

The “Introduction to the Stock Market” course is specifically designed for the beginner who wants to learn the basics of trading and investing in the Stock Market. For an outline of the course, and system requirements, download the pdf  here

It is currently anticipated that at least one presentation by your editor will be organised in Sydney, some time this year, but no formal date has been set at this stage.

Subscribers and non-paying members can still purchase a copy of the DVD “Dealing with the Bear”, consisting of a live recording of a presentation by your editor held in Chatswood in September last year. For more details see our website or send us an email at info@fnarena.com.

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