Archive through March 20, 2007
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     holycow
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Username: holycow
Post Number: 2842
Registered: 08-2004
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| | Saturday, March 17, 2007 - 08:44 am: | 
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Dow Theory... tips on how to cook a dead duck, and discussion
1. The stock market must undergo a significant correction, with "significant" defined in terms of length (more than just a couple of days) and percentage decline (more than just a few percentage points).
2. In the market's rally attempt following this correction, either the Dow industrials or the Dow Jones Transportation Average, or both, must fail to rise above where they stood prior to the beginning of the correction in step 1.
3. In the market's subsequent decline following this rally attempt in step 2, both the DJIA and the DJTA must drop below the lows they set in the correction in step 1.
*** ok, you don't like the catchy title? Well too bad.  At least I got your attention. Anyway, I reckon this theory needs a bit of revision because of these:
a) The development of Internet and E-commerce. A lot of the trades involved intellectual properties and do not require a great deal of transportation. Software and Microsoft is probably as good example - software can be delivered online and cost quite a fair bit, if deliver over the NET, the cost is relatively low. Microsoft is one of the largest companies in the USA, and Bill Gates is still the richest man in the USA (and the world?).
Financial services is another industry that has greatly benefitted from the rise of the NET, while this sector is an important member in the major indices, in many ways it doesn't require a lot of transportation.
b) The Western World has moved away from production of goods to service oriented industries which in many aspects do not require substantial shipping or transportation. In physical production of goods, the Western country such as the USA has chosen to move into high value goods and leave the rest of the mass production goods that are labour intensive to the developing world.
c) Tech stocks - it seems this is the sector/industry that is pulling the US market. I don't think tech stocks are bulky and heavy items, say comparing with automobiles, or shipping of coal. Does this make transportation less(er) important when come to serving its role as a confirming factor in Dow's Theory?
d) There are more arguments, but... I'll leave that to your imagination.
HC
"... I believe in Santa!"
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holycow
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Username: holycow
Post Number: 2843
Registered: 08-2004
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| | Saturday, March 17, 2007 - 08:58 am: |
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Gold -- a victim of its own success?
Traditionally, the precious metal has been seen as a way to hedge against losses in times of financial crisis and economic or political uncertainty -- and there's certainly been a great deal of that in the global markets recently...
*** didn't go into detail of this report coz I am not a "gold" person, but the 1st para tells a lot. Her choice of word - "traditionally" tells a lot because she didn't remember or realise TRADITIONALLY gold was selling quite cheap - definitely not at a whopping US$653.90 per tinee winee block. Not sure if she can see the "tradition" here has been broken?
I reckon gold story has been a success. Is a success. But will not be a success coz it has reached a summit and after reaching a summit, the next phase of journey is...
...it will not be an uphill story, but rather it is looking more like a plateauing or downhill sort of story. And just in case you don't remember, going downhill would take much less effort and time than going uphill.
Btw, that's just a comment, not a forecast... and please don't come and tell me when gold reaches US$800, you know I can't afford it
HC
"... I believe in Santa!"
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tony_m
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Username: tony_m
Post Number: 699
Registered: 01-2003Rating: N/A
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| | Saturday, March 17, 2007 - 10:17 am: |
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To me XAO weekly looks like the market has some upward bias but indecisive, at least that is how I see the weekly price action for the last 2 weeks. Seems to me that if it heads up we may see a modest rally of possibly some weeks or so or longer if the rally is constrained, hard to say for sure.
The reason for that in my view is that the market would be soon back in overheated territory so any rally cant be sustained for too long unless it is fairly pedestrian.
Another option is the completion of the yet potentially unfinished correction or maybe just stagnation until the picture about the world and US economies become clearer.
I watched the market closely on Friday afternoon with a 5 or 6 key stocks charted in real time and I was surprised at the emerging buying pressure after lunch. For example TLS had some very large volume orders going through and other stocks were well supported too, like CSL and QBE. There was a not unexpected Friday selloff at the close.
On balance I am tentatively positive and decided late in the day to take a few positions in liquid stocks with a solid chunk still in cash and so having a foot in both camps. I could be wrong but will run with tight stops for the moment and see how it goes.
Tony_M
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holycow
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Username: holycow
Post Number: 2844
Registered: 08-2004
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| | Saturday, March 17, 2007 - 12:58 pm: |
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Tony,
I spent the whole morning rationalising and contemplating about the market and there were plenty of what-if... here're some conclusions which are subjected to change:
1) based on past instances where the ASX has shown correction of similar or close to the depth we had recently, none of them took less than 1 month to get over the pain and fear as result of the rout. The longest is last May where it took about 5 months+ to really get out of the jitters generated. Basically the 5 month period is the time required for the herd to get over the pain and/or accumulate enough dough for another go at the market. I guess the moral here is the deeper the cut, the longer it will take to heal.
This time, the cut is actually deeper, but, the time it took to recover the lost ground I believe is too quick and too soon, hence any recovery is like you'd said - not sustainable and more of a dead cat variety.
I think the current correction would need at least 2 months to reach the bottom and possible another month to condition (moving sideway) the participants that the worst is over. Any thing less than that I would be sceptical and would treat the bounce to be short term.
2) I would rate the market to have a 40/60 chance of disappointing the bulls, ie, 40% to rally higher, 60% for the market to move sideway eventually down with further loss.
3) Privately I had raised my usual contrarian question with a couple of forum members: this time it seems many had got the exit timing right, and over the various forums I am reading many are anticipating 5500 to be the bottom and are waiting to enter the market at that level - my usual scepticism is - if everyone is right, who is gonna pay the bill?
At this point I am rather sceptical on what people generally are agreeing as I tend to see the masses to be getting it wrong most of the time. So to avoid the trap of being one of the herd, I am deliberately moving away from that "consensus" unless there're overwhelming and convincing factors to show me that's THE case.
My view is there is a good chance that the consensus timing and/or the depth of correction will be out (by a substantial margin), and many will be caught by such unexpected outcome.
4) There were fairly strong recovery in quite a few stocks last Friday. I have noticed that too. It came across to be some kind of shifting of funds, ie, moving from weaker stocks into stronger ones.
5) I went in with a small position in this one: a) due to the high vol spike, b) due to the fact that this stock seems immune to the recent market rout, I reckon it has reached its bottom, c) on checking with others' opinion, it seems this stock has fairly good outlook in its fundamentals...
IPM Daily
HC
"... I believe in Santa!"
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tony_m
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Username: tony_m
Post Number: 700
Registered: 01-2003Rating: N/A
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| | Saturday, March 17, 2007 - 07:01 pm: |
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HC,
All of the above could be right, so hard to tell at the moment. a factor to consider also is the weight of money thing in the local market.
From what I gather the incentive to take advantage of the chance to put serious money into super is going to see a considerable inflow, increasingly so as we move toward the end of the financial year in June. I know of quite a few who are busy boosting their existing super or setting up new funds.
Also because of the rules at the moment property cant be transferred into super as I understand it so there is a lot of investment property beng sold which will add to the inflow. There was an article in the SMH this morning about someone who is actually selling his residence for the same reason.
I dont know how much additional pressure this will add to the market, maybe the inflow in relative terms is not significant. However if it is significant I suspect it might have some impact on the market behaviour soon, that money has to go somewhere.
Tony_M
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ody
Member
Username: ody
Post Number: 755
Registered: 10-2006Rating: N/A
Votes: 0
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| | Saturday, March 17, 2007 - 11:54 pm: |
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Tony_M
HOUSING MONEY FLOWING INTO SUPER
A good post indeed, and very timely. I don't know that anyone knows quite at what time the really big inflow is likely to peak, but money is meanwhile certainly already being transferred. My wife and I did it several months ago, as we saw no point in waiting, but in our case we transferred shares, in specie. This does, of course, generate a capital gain over which you pay tax, but that is the last time we have to do it, ever, so we decided not to let that point stand in our way.
The people who sell investment properties are in all important respects in the same boat: they too must pay capital gains tax (for the last time), but they do have to sell their residential property/ies. That is really the only difference with shares: you can keep and transfer the shares, but not residential property. Th Eureka Report, which has a strong pro-property bias, in my view, is agitating for the law to be changed so that investment properties can also be transferred in specie. It is extremely unlikely to happen, as shares which get sold (as happens, in effect, when you transfer them in specie from a private owner to a super account) get taxed on the basis of the official market price paid (you cannot fiddle the sale). With a residential property, who is going to determine what its "objective" market price actually is if it gets transferred in specie?? It is in effect impossible to do.
In truth, the property owners are not getting nearly as rough a deal as they claim, which is why many people ARE selling their residential investment properties: according to the Eureka Report, the figures are very high. Most likely they will become a significantly larger factor, and one would hope that, as a result of the whole experience, a larger number of people will come to support the share market more. There is, of course, no guarantee of this, for once the money is in the super fund, that can once again invest in property.
My own interest in this whole matter is not purely short-term or, I'd like to think, selfish: I firmly believe that Australians invest far too heavily in houses and apartments. In this country about 70% of people's wealth tends to go into that asset class, whereas in the US it is only about 30%. It seems likely, doesn't it, that that is one reason why the US - whatever its faults - is a more productive country than Australia. Here, if we did not have our resources boom, we'd have to find other means of making up for that, and the way forward would not be yet more of a property craze. In relation to income, moreover, Australians also spend more on houses than just about any other nation. I see it as a national obsession which has SOME merit, but has become quite excessive.
The listed companies in Australia are resourceful and highly competent, and they deserve far more support than they are getting, so that we don't see e.g. so many good IT companies disappear into US hands, but develop them ourselves. I add here that I own no company myself, though I hold shares in quite a few.
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ody
Member
Username: ody
Post Number: 756
Registered: 10-2006Rating: N/A
Votes: 0
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| | Sunday, March 18, 2007 - 12:05 am: |
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holycow
SOME POINTS ABOUT CORRECTIONS
Do I understand you to say that the "cut" this time is "deeper" than in 2006? I think you need to think that over: the drop from top to bottom was then 12%, and surely we haven't reached that yet. Or do I misunderstand you??
Also, the five-months period last year was rather a-typical. In 2005 there were two corrections, a more substantial one early in the year, and a slighter one around September. The first correction certainly didn't take anything like five months, and the second was only very brief. Admittedly, in 2006 the fall had been bigger. Also, in 2006 the index had actually moved outside the bull channel, which meant a fiercer correction, both in depth and in length, than those in 2005.
Shane Oliver, in "Oliver's Insights", published a piece recently in which he gave a good many figures about how short or long corrections can be, and also how deep the cut may be. The variety is considerable, and generalisations are not easy to make. You'd still be able to find it through Google.
This correction, I would suggest, is as yet very hard to judge, in terms of either its depth or its length, on any comparative basis. But I can only agree with you that it would be unnatural and unusual for the market to go up, and the correction to finish, at around this point. It would be far more probable, not least with so much nervousness, for us to go down again before we go back up, and also for that process to take some time yet.
(Message edited by ody on March 18, 2007)
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holycow
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Username: holycow
Post Number: 2845
Registered: 08-2004
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| | Sunday, March 18, 2007 - 08:59 am: |
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Tony,
I think there's a difference between people setting up super fund, and people setting up super fund and injecting their properties into the fund. I know the super changes is a big attraction to many people but so far I have only heard of very few cases where people are rushing to sell their properties. I have been asking a couple of friends who are in the property business and what I got is rather ambiguous, ie, yes it seems to be the talk, but it is not reflected in the property market.
Another observation, according to A.Kohler the super funds are the chief lenders to the private equity funds - I see this to be a reflection that the super funds are not considering the equity market to be providing that good a return (say to their internal ROR). If this is the case, I believe there's a good reason for them to keep the money they manage in their pockets and let the market corrects itself to a level that they start seeing "value", and meeting their internal target.(?)
Anyway, with all these second guessing, I believe we really have no choice but to give the market more time. My take at this point is the market may be rallying towards month end short term and then... we will see.
Cheers.
HC
"... I believe in Santa!"
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holycow
Member
Username: holycow
Post Number: 2846
Registered: 08-2004
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| | Sunday, March 18, 2007 - 09:32 am: |
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Ody,
1) the cut this time is deeper means the 2 single day (deep) cuts we had this time were much more severe and deeper than prior cases. But since the total correction amounted to about 6-7%, and with the strong rebounce both times, I see the corrective effect of the cut this time to be quite "muted" and hence did not actually remove a lot of "fat" from the market.
Looking at it from a bear's perspective - the market is still very pricey and more cuts are still needed. But from a bull's perspective, it probably can be interpreted as a reflection of strength and their conviction.
2) I do not see 2005's corrections as atypical. I see the corrections as an echo to what's happening in the US market. Both times, I believe they were sentiment driven because of the US markets (they were going through correction). This time I think there should not be too much difference. With the US market correcting substantially and are in a jittery state, there's a good chance that the they will correct further, whether that will scare the lots in ASX though is a separate issue.
Locally, the main factor that is distorting the corrective pressure coming from overseas is the super changes that we had discussed above. Other than this, I believe the commodities lift to ASX is coming to an end, and I don't subscribe to the argument that the commodities lift is still there to help the miners. There's very little growth left,without growth, their stock price will face pressure.
3) Shane Oliver's view and yours - I think it kind of fit into this view of mine - we choose to see what we want to see and believe. I read his view but I don't really believe in what he says. In anycase, the market will always find a way to tell and show us whether we are right or wrong. I prefer the market than him.
Cheers.
NASDAQ Comp vs XAO Daily
HC
"... I believe in Santa!"
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rdumas
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Username: rdumas
Post Number: 385
Registered: 11-2006
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| | Sunday, March 18, 2007 - 10:33 am: |
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S&P500 and All Ords
Hi HC,
So far neither index has broken through the down trend line. Until they do, we're going to continue heading in a downwards direction.
The All Ords really wants to go up but the S&P500 has a lot going against it in terms of overhead resistance and will drag down our index with it.
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ody
Member
Username: ody
Post Number: 757
Registered: 10-2006Rating: N/A
Votes: 0
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| | Sunday, March 18, 2007 - 10:51 am: |
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holycow
In referring to Shane Oliver's piece, I didn't say anything about his interpretation of the market being correct or incorrect: as I pointed out, in the article I referred to he gives figures as to how long corrections have lasted, historically, and how deep the drop was in each instance. These are not a matter of subjective interpretation at all - simply of fact. As you correctly see the market as the final arbiter of all things (it is that as a matter of fact, indeed), you surely would not deny that there are also verifiable market facts, which have absolutely nothing to do with whether you, Oliver, or I like them or not. In making comments about corrections over time, it seems to me useful to know what the facts actually were.
As for the current correction: I do now know what you meant and I agree with you both on the matter of two-day cuts and the comparative shallowness of the total drop so far. In that respect market conduct this time has been significantly different from e.g. that in 2006. We also agree that more time is needed before it will be possible to say that the correction is over, and just what it has been like. At some time, we shall actually know - as a matter of fact. Meanwhile we can only subjectively interpret what may happen - on that we seem agreed.
Indeed, as you say, the 2005 corrections were, in fact, quite "typical" corrections. That was actually one of my points. And yes, the US has been a highly influential factor in each single case we have discussed. That, too, can be demonstrated as a matter of fact.
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tony_m
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Username: tony_m
Post Number: 701
Registered: 01-2003Rating: N/A
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| | Sunday, March 18, 2007 - 10:55 am: |
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HC,
There is no doubt that the healthiest outcome that we can have now is a solid correction to restore some value and the jury is still out about the current correction. I would not be unhappy to see the correction continue down to the consensus which seems to be around the 5400-5500 level.
I have moved back in to some extent but that is more about opportunism than anything else at this point, it is just too early to tell. I would be back on the sidelines in a flash if there is a whiff of the market going south. The next few days should tell.
I sense whilst reading a lot of posts that a fairly common view is that the template being used for this correction is the May 2006 event. The May 2006 event ran essentially until October with a failed recovery attempt in early July.
I am not sure that I subscribe to the theory about the similarities this time. For starters the May 2006 correction was triggered by 2 significant components. The market was seriously overheated and due for a fall as is the situation now but moreover metals prices collapsed then but this time they are climbing or at least stable.
If you overlay the XAO or XJO on the metals index you can see basic similarities, they both started to fall in May, they both attempted a recovery in early July and they both got back to square one in early October.
Maybe this is drawing too long a bow, I dont know, but I suspect a lot of people have forgotten that plummeting metals prices were a significant factor in the fall last year and maybe this correction is just more about 'its time' and wont necessarily follow the behaviour in May.
If I sound bullish, I dont mean to, I am extremely wary right now with the situation in the US with property issues to yet fully reveal their underlying impact on the US and world economies or not as the case may be.
Tony
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