FYI | Aug 05 2011
By Rudi Filapek-Vandyck
"When the facts change, I change my mind. What do you do, sir?"
Newsletters and financial experts the world around have been left scrambling for alternative scenarios this week as the sell-off in equities is proving much longer and stronger than anticipated. The first thing that comes to mind is that famous quote by John Bernard Keynes (see opening sentence). The second thought takes us back to 2006, when legendary funds manager Ken Fisher introduced the share market as "The Great Humiliator" (see also my Weekly Analysis carrying the same title earlier this week).
Fear and concern are ruling the international climate and technical limits -firm in focus these past weeks- are providing little to no support during this month's risk assets exodus.
Let's start with the simplest of all observations: the Australian share market is likely to follow through with the extremely weak guidance from overseas, after US equities experienced one of the weakest sessions for years, last witnessed back in 2008 when the world was only starting to coming to grips with the significantly changed environment. This means the trading range of 4200-5000, in place since August 2009 will be broken, and it will happen to the downside.
New territory – and it doesn't exactly bode well for risk assets.
First up are the technical analysts and chartists and many are now warning forward scenarios are being re-written as all kinds of technical resistance levels are proving futile.
The Chartist points out on Friday morning the most important level for the ASX200 index in Australia is 4134. A sharp drop through suggests investors are witnessing a 5-wave decline off the major highs rather than a 3-wave, explains the Chartist. In layman's lingo, this translates into a lower "absolute downside target" for the index, between 3600 to 3800.
That's still a long way lower.
Technical market analysts at Barclays in London equally acknowledge risk assets have increasingly been putting ever so bearish outlooks on price charts. And the world around, from Brazil to Israel to Australia, equities are breaking all kinds of support levels which indicate more weakness should be in store. Barclays' analysis is further supported by the fact that other risk assets, such as copper, aluminium, crude oil and natural gas, are all pointing towards more weakness ahead. Even gold and silver should be pulled lower during this process, predict the analysts, though it would appear, on technical analysis, there's less downside in precious metals gold and silver than there is in crude oil.
This morning, Bell Potter's Julia Lee, on Sky Business, even went one giant step further, predicting that if the neckline of a multi-year Double Top formation for the ASX200 index on price charts is broken (located at 4175) then the next technical target will shift to 3300.
Meanwhile, we have been reliably informed that Mary Anne and Pamela Aden, whose Aden Report has cult status amongst investors worldwide, is now advising readers should immediately abandon all US and global equities, including all equity exposures to energy and resources, with all proceeds to be kept in US dollars. The Aden sisters remain positive on gold and silver.
Also, we couldn't help but noticing analysts at Goldman Sachs decided to upgrade their rating for Bank of Queensland ((BOQ)) to Buy on the argument that risks are real, and downside pressures are so too, but all of that, plus so much more, has now been priced into the BOQ share price. In addition, telecom analysts at the firm initiated coverage on iiNet ((IIN)) and TPG Telecom ((TPM)). The first is rated Buy, the second Hold.
Earlier this week, global asset strategists at Citi drew the obvious conclusion: "Gold has become the asset class of choice".
It has to be noted, not every share market bull is ready to throw his hat in the ring just yet. US-based Sound Advice, raging market bull since 2008, when "hero" status was reportedly achieved by going against the grain, is refusing to give up on its bullish view on equities. Note, Sound Advice is for the time advising a selective approach, with attention directed to… higher dividend-yielding shares.
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