Category: Stock Markets

Analysis of major stock markets around the world.

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ASX correction

Despite bullish signs in Japan, China and the US, the ASX 200 is undergoing a correction. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Breach of medium-term support between 4900 and 5000 would indicate a test of primary support at 4650. Respect of medium-term support seems as likely, however, and would signal a healthy primary up-trend — as would a Twiggs Money Flow trough above zero.

ASX 200

The ASX 200 VIX index recovered above 15, but continues to indicate low market risk.

ASX 200

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S&P 500: No sign of a correction

The S&P 500 has reached its target of 1800 for the current advance, suggesting the market is due for a correction. But there is no sign of selling pressure on 13-week Twiggs Money Flow. Follow-through above 1820 would suggest an accelerating up-trend — with sharper gains and shorter retracements. Reversal below short-term support at 1780 is less likely, but would warn of a correction.

S&P 500

* Target calculation: 1725 + ( 1725 – 1650 ) = 1800

CBOE Volatility Index (VIX) continues to indicate a bull market, with readings below 15.

VIX Index

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Asia: China buying pressure but HK retreats

Japan’s Nikkei 225 is retracing to test its new support level around 15000. 21-Day Twiggs Money Flow holding above zero indicates buying pressure. Respect of support would confirm a primary advance, with a long-term target of 17500*. Reversal below the rising trendline is unlikely, but would warn of a correction to the base of the formation at 12500.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

China’s Shanghai Composite is testing resistance at 2250. Breakout would signal a primary advance to 2450. 21-Day Twiggs Money Flow holding above zero indicates buying pressure. Reversal below the rising trendline is unlikely, but would warn of trend weakness.

Shanghai Composite Index

Hong Kong’s Hang Seng index retreated from resistance at 24000. Expect short-term support at 23500. Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure. Breach of the rising trendline would warn of a correction. Breakout above 24000 is less likely, but would signal a primary advance to 24500, with a long-term target of 25500*.

Hang Seng Index

* Target calculation: 23500 + ( 23500 – 21500 ) = 25500

India’s Sensex also warns of selling pressure, with a bearish divergence on 21-day Twiggs Money Flow. Respect of resistance at 21000/21200 would strengthen the warning. And reversal below 20200 would signal a correction. Breakout above 21200 is less likely, but would confirm the primary advance, offering a target of 24000*.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

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ASX correction despite Asian bulls

Japan’s Nikkei 225 is likely to retrace to test its new support level at 15000. Respect would negate the bearish divergence on 13-week Twiggs Money Flow and confirm the long-term target of 17500*. Reversal below the rising trendline, however, would warn of a correction to 13000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

China’s Shanghai Composite is consolidating between 2100 and 2250. Upward breakout would suggest a test of the descending trendline at 2450 on the monthly chart. Momentum remains weak and reversal below 2100 is as likely, which would test primary support at 1950.

Shanghai Composite Index

Hong Kong’s Hang Seng is testing this year’s high of 24000. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 24000 is likely and would signal a primary advance to 24500, with a long-term target of 25500*. Reversal below 23500 is unlikely, but would warn of another test of 22500.

Hang Seng Index

* Target calculation: 23500 + ( 23500 – 21500 ) = 25500

India’s Sensex is headed for a test of 21200 after respecting support at 20200. Breakout above its 2007/2010 highs at 21000 would confirm the primary advance, offering a target of 24000*. Another 13-week Twiggs Money Flow trough above zero would strengthen the signal. Reversal below 20200 is unlikely, but would warn of a correction to primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

The ASX 200 is undergoing a correction after breaching the rising trendline and support at 5290/5300. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure, but a trough above zero would indicate a healthy (primary) up-trend. There are plenty of support levels evident on the chart, but I would expect strongest support around 4900 and the 2009/2011 highs of 5000.

ASX 200

The ASX 200 VIX index, below 15, continues to indicate low market risk.

ASX 200

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DAX leads the way

The FTSE 100 continues to test support at 6600. Upward breakout from the recent flag formation would signal an advance to the December 1999 high of 6950/7000*. Falling 13-week Twiggs Money Flow suggests medium-term selling pressure, but a trough above zero would be a long-term bull signal. Breach of 6600 would warn of a correction to primary support and the rising trendline at 6400.

FTSE 100

* Target calculation: 6700 + ( 6700 – 6400 ) = 7000

Dow Jones Euro Stoxx 50 continues its test of resistance at 3100 on the monthly chart. Rising 13-week Twiggs Momentum suggests a primary up-trend. Breakout above 3100 would signal an advance to 3500*. Reversal below 3000 is unlikely, but would indicate a correction to the rising trendline.

Euro Stoxx 50

* Target calculation: 3000 + ( 3000 – 2500 ) = 3500

Germany’s DAX leads the way with a strong advance to 9500*. Steeply rising 13-week Twiggs Money Flow signals strong buying pressure. Respect of the target at 9500 would suggest a correction to the rising trendline and support at 8500.

DAX

* Target calculation: 8500 + ( 8500 – 7500 ) = 9500

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TSX tests resistance

Canada’s TSX 60 is testing resistance at 780 on the monthly chart. Breakout would signal an advance to 800* — and possibly the 2011 high of 820. Rising 13-week Twiggs Money Flow indicates buying pressure. Respect of resistance is unlikely, but would warn of a correction to 740.

TSX 60

* Target calculation: 740 + ( 740 – 680 ) = 800

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Bullish outlook despite retracement

Dow Jones Industrial Average retraced to test short-term support at 16000. Breach would suggest a correction to test the rising trendline at 15500. Mild bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure. Target for the advance is 16600* and respect of support at 15500 would suggest another advance.

Dow Jones Industrial Average

* Target calculation: 15700 + ( 15700 – 14800 ) = 16600

The S&P 500 is also testing short-term support, but at 1800*. Bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure. Breach of support would signal a correction to the rising trendline around 1730. Respect of the trendline would indicate a healthy up-trend.

S&P 500

* Target calculation: 1725 + ( 1725 – 1650 ) = 1800

CBOE Volatility Index (VIX) below 15 continues to indicate low market risk.

VIX Index

Bellwether transport stock Fedex displays a huge surge on the monthly chart, with rising Twiggs Money Flow indicating strong buying pressure. A bullish sign for the US economy.

Fedex

* Target calculation: 100 + ( 100 – 70 ) = 130

The Nasdaq 100 continues its accelerating up-trend. Rising Twiggs Money Flow, with higher troughs above the zero line, indicates strong buying pressure. Target for the advance is 3550*. Reversal below 3350 would warn of a correction. Short corrections and narrow consolidations are typical of an accelerating trend. Unsustainable in the long-term, accelerating trends almost inevitably lead to a sharp correction.

Nasdaq 100

* Target calculation: 3400 + ( 3400 – 3250 ) = 3550

Overall, I am bullish on the US market. Attempting to time entries and exits from secondary movements is expensive and our strategy at Research & Investment is to remain in the market unless risks become elevated.

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What is contributing to the surge in US corporate profits?

Some concern has been expressed in the media about the rising level of margin debt in the US. When expressed as a percentage of GDP, NYSE margin debt is approaching 1999/2007 levels.

NYSE Margin Debt as percentage of GDP

But not only margin debt is rising. Market capitalization, while not as fast, is also on the increase.

NYSE Market Cap as percentage of GDP

And market cap merely reflects the underlying rise in corporate profits, measured here as a percentage of GDP.

Corporate Profits as percentage of GDP

My initial reaction was to attribute the rise to increasing globalization of US corporations, but Rebecca Wilder points out that earnings from abroad have scarcely grown. Closer scrutiny of the Bureau of Economic Analysis Q1 2013 release shows Manufacturing is the top growth sector.

So what is contributing to the surge in corporate profits?

Employee compensation has declined as a percentage of net value added by the corporate sector over the last decade.

Corporate Profits as percentage of GDP

And there has been a sharp rise in petroleum and coal output, reflected by producers’ annual value shipped ($billion) in the graph below.

Petroleum and Coal shipments

Also, the percentage of corporate profits paid as taxes is shrinking. The following graph compares corporate profits after tax to corporate profits before tax. Less than 20 percent of corporate profits is currently being paid in taxes.

Corporate Profits as percentage of GDP

Are these ratios sustainable?

While unemployment remains high, growth in employee compensation is expected to be low. And corporate taxes are likely to remain low until there is a major overhaul of the tax code (don’t hold your breath). So market capitalization is likely to remain strong for at least the next two to three years.

Australia

Australian margin debt is declining steeply as a percentage of GDP.

ASX Margin Debt to GDP

ASX market capitalisation as a percentage of GDP is also trending lower. The 2009/2012 lows should provide a sound base for further gains.

ASX Market Cap to GDP

The ASX is muted compared to US markets, but offers value in the long-term.

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Muted ASX response to Asian bulls

Japan’s Nikkei 225 is likely to retrace to test its new support level at 15000. Respect would negate the bearish divergence on 13-week Twiggs Money Flow and confirm the long-term target of 17500*. Reversal below the rising trendline, however, would warn of a correction to 12500/13000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

Narrow consolidation at China’s Shanghai Composite upper trend channel suggests continuation of the rally. Follow-through above 2210 would signal a test of 2270. Reversal below 2180 is less likely, but would indicate a down-swing to the lower channel. The 21-day Twiggs Money Flow trough above zero suggests medium-term buying pressure. Breakout above 2270 would signal a primary up-trend.

Shanghai Composite Index

Hong Kong’s Hang Seng is likely to retrace to test the new support level at 23500. Respect would confirm an advance to 25500*, signaling a primary up-trend. Follow-through above 24000 would confirm. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 23500 is unlikely, but would warn of another test of 22500.

Hang Seng Index

* Target calculation: 23500 + ( 23500 – 21500 ) = 25500

India’s Sensex is again rallying after testing support at 20200. Breakout above its 2007/2010 highs at 21000 would confirm the primary advance, offering a target of 24000*. Another 13-week Twiggs Money Flow trough above zero would strengthen the signal. Reversal below 20200 is unlikely, but would warn of a correction to the rising trendline and primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

Singapore’s Straits Times Index is struggling with resistance at 3250/3300. 13-Week Twiggs Money Flow below zero continues to warn of selling pressure. Breakout above 3300 is unlikely at present, but would signal a primary advance to 3600*. Reversal below 3120 would warn of another correction to primary support at 3000.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

The ASX 200 continues to encounter selling pressure, with 21-day Twiggs Money Flow below zero. Reversal below the rising trendline and short-term support at 5290 would signal a correction. Breakout above 5400 is less likely, but would suggest an advance to 5600*. Follow-through above 5450 would confirm.

ASX 200

* Target calculation: 5450 + ( 5450 – 5300 ) = 5600

Readings on the ASX 200 VIX index are more bullish, suggesting relatively low market risk.

ASX 200

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FTSE flags further gains

Upward breakout from the recent flag formation on the FTSE 100 would signal an advance to the December 1999 high of 6950/7000*. Rising 13-week Twiggs Money Flow suggests medium-term buying pressure, but the specter of a long-term bearish divergence remains. Expect strong resistance at 7000. Reversal below 6600 is unlikely, but would warn of a correction to primary support and the rising trendline at 6400.

FTSE 100

* Target calculation: 6700 + ( 6700 – 6400 ) = 7000

Narrow consolidation on Dow Jones Euro Stoxx 50 above support at 3000 is also a bullish sign. Rising 13-week Twiggs Momentum suggests a primary up-trend. Breakout above 3100 would confirm an advance to 3500*. Reversal below 3000 is unlikely, but would warn of a correction to the rising trendline.

Euro Stoxx 50

* Target calculation: 3000 + ( 3000 – 2500 ) = 3500

Germany’s DAX is heading towards its target of 9500*, with steeply rising 13-week Twiggs Money Flow signaling strong medium-term buying pressure. Breach of the latest trendline is not likely, would indicate a correction to support at 8500.

DAX

* Target calculation: 8500 + ( 8500 – 7500 ) = 9500

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