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Time For Caution

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 29 2015

This story features TELSTRA CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

In this week’s Weekly Insights:

– Time For Caution
– Rudi On TV
– Rudi On Tour

Time For Caution

By Rudi Filapek-Vandyck, Editor FNArena

Market observers in the USA and elsewhere are pointing out the equities bull market in 2015 is being carried by a shrinking number of stocks, which raises all kinds of questions about the health and inner-strength of leading indices.

Note, for example, the following observation:

“When one looks at the composition of the Nasdaq 100’s 10% year to date gain, 60% of that gain is attributable to 3 companies – Apple, Amazon and Google. If one adds the contributions made by Facebook, Gilead and Netflix, the 6 companies are responsible for 80% of the Nasdaq 100’s year to date gain.” (original observation made by Mike O’Rourke, Jones Trading)

Similar observations can be made about Emerging Markets where the prospect of the Federal Reserve probably lifting the Fed funds rate in September is causing all kinds of turmoil and mayhem:

“Currently, 82% of all emerging market stocks are in a correction and the majority of stocks, 54%, are in a bear market. . . . The market-cap weighted MSCI Emerging Market Index is only down -7.33% over the last 200-days. So even though the vast majority of EM stocks are down much more than that, the largest companies are keeping the headline index price afloat.” (original observation made by GaveKal).

Technical analysts at UBS have been observing how the breadth of the US equities market has been steadily declining since mid-2014 (last year’s summer for the Northern Hemisphere). It means that while on the outside everything seems healthy and fine, with new record highs being recorded with each short-term rally, the number of stocks carrying these gains continues to decline.

According to the UBS’ team’s observation, things in particular have worsened over the past few months. The majority of stocks that make up the Russell 2000 index (small and mid-cap stocks in the US) is now down for the year. The last time the S&P500 hit a new all-time record, only 76 of its constituents reached new 52-week highs while at the same time nearly 200 stocks (40% of the total index) were hitting a new 52-week low.

At the very least, we should be concluding that divergence among US equities is getting wider, bigger and increasingly noticeable.

Divergence is on UBS’s radar too. US transport companies have been diverging from the Dow Industrials, a bearish signal if you trust the century old Dow Theories. But so too have semiconductor companies and the team at UBS points out divergence by the US Semiconductor Index (“SOX”) has been a forewarning signal ahead of big sell-offs in US equities during July-September 2011 as well as the summer of 2012.

Attention better be paid.

The Situation In Australia

The world’s most important central bank would like to start lifting interest rates in September and this is causing a large number of investors to have another look at their exposures and at the composition of portfolios. If this leads to a majority of stocks losing momentum and sinking to 52 week lows while a steadily shrinking few are left holding up indices, then, of course, this is of genuine concern and it should have every investor’s attention.

Before we try to assess potential implications, what exactly is the situation in Australia? Given the local market’s heavier exposure to banks, mining companies and energy producers, surely this means the situation locally is a lot worse than overseas?

Prices of crude oil, iron ore, gold and base metals have been correcting to the downside in recent weeks and even before this happened, most commodities had been suffering for much longer. So yes, there are a lot of stocks listed on the Australian stock exchange that don’t look particularly exciting from the sidelines. But then a large number of stocks looks perfectly fine.

The ASX200 is up some 3% since December 31st. Add 2%+ in dividends and the average gain for investors in the local share market is some 5%+ in a little over six months. Which stocks have been responsible for these gains?

Turns out more than half of ASX200 constituents has been generating a positive result for shareholders thus far in 2015, dividends not included. A closer look into this matter shows Australia does not have a problem of few stocks doing all the hard work, obfuscating what is really going on underneath the surface of the index. It’s actually the exact opposite.

Out of the Top Ten, which represents some 60% of the index, only two stocks have been good to their shareholders (and to the index) over the past seven months; Telstra ((TLS)) and CSL ((CSL)). All others (Big Four Banks, BHP Billiton, Woodside, Wesfarmers and Woolworths) only had their dividends for a positive contribution. This implies a lot of the smaller stocks have been doing a lot of work to compensate for the failure of their much larger brethren.

Step outside the Top Ten and you’ll find at least half of the Top Fifty has performed positively this year including non-Big Four financials such as Macquarie Group ((MQG)) and AMP ((AMP)), infrastructure owners such as APA Group ((APA)), Sydney Airport ((SYD)) and Transurban ((TCL)) and foreign currency earners such as Amcor ((AMC)), James Hardie ((JHX)) and Boral ((BLD)).

Even if I were to add those stocks trading around the share price level from the beginning of the year to the negative contributors for 2015 thus far, I am still left with half of all ASX200 constituents who put in a positive contribution ex-dividend. That’s not bad given so many stocks are either direct derivatives of base materials and/or energy, or they represent structurally challenged sectors such as print media and free to air TV. Certainly, I was expecting to discover a worse picture beforehand.

Earlier in the year, the index was up by double digits, so it shouldn’t surprise any of us that most stocks might still be trading higher than at the start of the year, they are also mostly off their peak. How do we determine whether the technical picture has deteriorated significantly?

Australia Has Problem At The Top

Apart from looking whether today’s share prices are still up for the year, I decided to add three more observations:

– is the share price below the 200 day moving average?
– is the 60 day moving average below the 200 ma?
– is the 200ma trending south?

A healthy stock on a healthy trend does not trade below the 200 moving average. It really is this simple. And if something unforeseen happens that pushes the share price below the 200 ma, a good and healthy stock recovers swiftly and rapidly. In all other scenarios whereby the positive trend gradually deteriorates, we will also see the 60 ma cross over to trade below the 200 ma. If the 200 ma is also trending lower, this really spells bad news (it’s called a Death Cross for a reason).

The bad news first. Some 90 stocks out of the ASX200 are trading today with the 60 ma below the 200 ma, indicating current momentum is lousy and probably skewed towards more bad news. In many cases, the 200 ma is not just trending lower, it’s falling like a rock indicating negative momentum on steroids.

One example presented on Monday is Navitas ((NVT)). At first sight, the company’s market update disappointed and the share price sold off. Within the context of this analysis, I note the share price was well below the 200 ma, the 60 ma is clearly below the 200 and the latter is unmistakably trending south. In other words: prior to Monday’s release, the shares were already positioned to favour more bad news.

But many an investor does not carry any of such stocks in his or her portfolio. Think Arrium, Bega Cheese and Cabcharge. Also, many energy companies, including the likes of Woodside, Santos, Origin Energy, even Oil Search, are at present displaying awful medium term momentum. Add large and smaller miners plus engineers and services providers and you can picture the “best to avoid” club all by yourself.

What should be of concern to local investors is the fact that nine of the eleven largest index members are now solidly trading below the 200 ma with the 60 ma below and the share price at the start of the year above. This is not a pretty sight. It does not show health. It shows fragility and vulnerability instead. In a worst case scenario, this picture confirms the concerns expressed overseas about deflating momentum and inner-fragility building.

Are Banks And BHP Still Relevant?

Traditionally, I use the banks and the two big diversified resources companies as a mini-indicator as to where the share market is heading. In a reduced version, I simply look at CommBank and BHP shares.

However, every market indicator will at some point lose its relevance. Which is why I stopped paying attention to BHP and RIO a long time ago. Both are no longer indicating anything other than their own problems, in my view, but what about the banks and the two big consumer staples stocks?

There is a valid argument to be made that both banks and supermarket owners are equally battling sector specific headwinds at the moment. It does make investing in blue chip stocks in Australia yet another notch more difficult, but banks are still regarded as Asia’s derivatives listed in Australia by foreign investors. It is therefore easy to see how general worries about growth in China and in Emerging Markets generally has by now translated into a deteriorating technical set-up for the Big Four.

Personally, I find the fact that CommBank shares are struggling to remain in positive territory for the year (not succeeding at the moment), with the 60 ma having crossed the 200 ma to the downside, quite disconcerting. Luckily, the 200 ma is still trending upwards, otherwise I would genuinely become a lot more worried about what possibly lays ahead.

Needless to point out, but the trend set-up for BHP Billiton simply looks awful. The share price is near the low for the year, the 60 ma is falling rapidly and well below the 200 ma which is descending rapidly too. Awful. Simply awful.

The Fed? The USD? Or Both?

It’s not always easy to decipher what exactly are the indicators signalling. Should we focus on the fact that so many stocks are still in positive territory? I am more cautious about it all. Markets, just like societies, have leaders. Right now the leaders in the Australian share market look weak, vulnerable, fragile and things could well get a lot worse in the short to medium term.

In the USA, many a chartist has been calling for a 10-15% correction this year. Thus far the main indices over there have resisted any temptation to respond positively to such predictions, but a deteriorating picture of inner-strength, whereby a smaller number of stocks keeps up the faith, must mean such a broad-based correction is simply becoming more likely.

This is exactly the view of said technical analysts at UBS who have been patient in their prediction of a broad-based correction in US equities. A noticeable erosion in underlying momentum, with divergences appearing, fits in nicely with such prediction. One key factor this year is the change in monetary policy at the Federal Reserve. Will this be the trigger that unleashes the global selling of equities?

The team at UBS thinks September-October will bring about a sharp correction caused by a too strong US dollar and further rising interest rates.

There’s good news in their message too, as post the sell-off, investors will be presented with excellent buying opportunities in equities and commodities with the UBS team predicting a multi-month rally leading into 2016.

P.S. Subscribers can do this research themselves via R-Factor and Stock Analysis on the website.

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Wednesday, starting 9pm, Your Money, Your Call Equities (host)
– on Thursday, Sky Business, noon-12.45pm, Lunch Money
– on Thursday, between 7-8pm, Switzer TV

Rudi On Tour

I have accepted invitations to present:

– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland – for more information about this event:

Note: FNArena subscribers can attend at similar discount as AIA members

(This story was written on Monday, 27 July 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: or via Editor Direct on the website).



This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.



Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena’s free bonus package for a paid subscription (excluding one month subscription).

If you haven’t received your copy as yet, send an email to

For paying subscribers only: we have an excel sheet overview with share price as at the end of June available. Just send an email to the address above if you are interested.

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