Wednesday, April 25, 2012

Stockmarket Update 25 April 2012

I have had a number of inquires over the past few weeks as to why there has not been an ECAM blog update (last blog post dated 05 March 2012).

Quite simply, the reason why is because the markets have been little changed over the past 6 weeks.

As measured by the iShares MSCI ACWI Index Fund (the ETF as use as my MSCI World Index proxy to monitor equity investments in the EK Provident Fund), for the past 6 weeks the "entire worlds stock market" is down a total of 1.8%.  In other words, we have gone absolutely no where.

The problem continues to be the Eurozone countries (ex U.K. and Germany) which are dragging down the rather strong performance in the U.S.  In the following charts I will give you an idea as to what is happening:

Click on all charts to enlarge:


Spain


With the exception of Greece, all eyes are currently on what is considered the next domino to potentially fall.  This is Spain and it is "Ground Zero" currently.

As can be seen on the chart, price has broken through a key support level @ 7640 to 7722 over the past 2 weeks.  The next level of support (not shown on this chart) is at 6702 (the bottom reached in the 2008-2009 bear market crash).

There is every reason to believe technically we will get there given the ongoing problems with budgets in Spain.  The question is whether we hold there or continue to fall to reach the 2003 lows of the previous bear market @ 5267.


Italy


The next mess in line is Italy.

It is not in quite as bad shape as Spain technically as price has currently declined to find support at the lows it experienced in Nov 2011 @ 13915 followed by the Oct 2011 lows @13474.

I am watching this twin layer of support exceptionally close; a break below this level will be very bad news for Italy (and the Eurozone as a whole).  The reason why is because the 13747 level coincides with the 2009 bear market low (not shown on the chart) @ 13636 which also acted as support going all the way back to 1995.  As such, a break below the area 13474-13915 opens the door to lower levels not seen since 1993!

This current level HAS to hold on the Italian index or I believe all hell is going to break loose.


France


Of the large European markets, France is in the worst shape.

A nice double bottom pattern off the Sept and Nov lows resulted in a break above resistance @ 3368.  Unfortunately it appears the French general election uncertainty is tainting this market and price was unable to hold above this important level (3368) at the end of March.

The second round of elections May 06 will be interesting.  Should we break the double bottom before then @ 2781 to 2822 the next level will be the 2009 lows @ 2519.


Germany


Of the large Euro markets, Germany continues to hold up rather well.

A nice upward trend has formed from the Sept 2011 bottom and key resistance @ 6349 to 6513 was broken upwards in Jan 2012.  This key level has now become support.

Price has declined recently but is holding this important level.  Should these support levels be broken to the downside (along with a trend line break @ 6200) I would become very worried the "contagion" from the smaller Eurozone countries is infecting the strong.  So far that is not the case but bears close watch.


United Kingdom


The U.K. market is in similar shape to Germany.  The low from late Sept has formed a nice uptrend line with price breaking previous resistance @ 5528-5598 in Jan 2012.

Price has come back to test this support level along with the uptrend line (note the bounce off this 5598 support + trend line).  A break of the trend line + 5528-5598 would be another "weak infecting the strong" indication.  So far this is not the case.


Euro Zone Stocks 50



Taking all the above into account, it is interesting to look at the Dow Jones Euro Stocks 50 Index (the top 50 market cap weighted companies in the Eurozone).

As shown on the chart, the effects of the weaker Eurozone countries are having a profound reaction on the overall strength of Europe.  Price initially managed to break key resistance @ 2476 to 2500 in early Feb 2012 but has since been unable to hold it.  Not shown on the chart is an uptrend line drawn from the 1995 lows through the 2090 low.  This was broken last week and is another ominous sign.  The next level of support is around the 2200 area followed by the previous lows @ 2090 to 1995.

Should the weaker Eurozone countries continue to decline it appears to me the contagion will show up in this chart. 



China


China has been a relative under-performer for quite some time now.  Whereas most major markets found a bottom (at least for the short term) in Sept/Oct 2011; China continued lower to the end of 2012.

Since the beginning of the year China has been on a mildly positive trajectory.  Price broke the downtrend line and the key resistance @ 2363 but has currently been unable to take out the next level @ 2529.  It remains below the 200 day moving average (2442) and appears to be currently range bound between 2252 to 2460.

A breakout above the 2460 to 2529 level would be bullish and a welcome change from all the doom and gloom centered in Europe.  Whether China can do so given the current recessions ongoing in Europe (its largest trading partner) will be interesting to see.


India


In a similar vein to China, India has been in a protracted decline that appears to be stabilizing.

As per China, price did not find a bottom in the Sept/Oct 2011 time frame as most other countries, but continued lower into Dec 2011.  Since then India has been on a tear; breaking both the strong resistance @ 5225 and the downtrend line from the opt in Nov, 2010.

Price is currently consolidating near the important 5225 level (which is now acting as support).  A break below this level would be worrying but numerous attempts over the past month have held.  Should this consolidation continue the outlook looks moderately positive.  Below 5225 and all bets are off!


ACWI


Having looked at the above, here is a look at the "World" as defined by the iShares MSCI Index ETF.  This is my proxy for equity investments in the EK Provident Fund.

On the positive side, price found support in late Sept 2011 at 37.58.  It regained the 200 day moving average in mid-Jan 2012 and since then price has nicely risen to break above key resistance @ 44.83-45.10.

On the negative side, price has been unable to break above key resistance @ 48.12-48.51 as shown on the chart.  The highs in Feb-Jul 2011 are a key resistance level that must be overcome for the EK Provident equity funds to advance.

We are currently stuck in between key support and key resistance.  Until the market "shows its hand" by either breaking below key support (44.83-45.10) or above key resistance (48.12-48.51)  it is literally a "coin-toss" as to which way we go.


Wiltshire 5000


I thought it would be interesting to contrast all the above with the relative outperformance of the U.S. markets.

If you review all the charts above one of the key differences in the U.S. is the markets ability to take out the previous highs set in Mar-July 2011.  As shown on the Wiltshire 5000 Index (a very large sampling of the top 5000 companies in the U.S.), key resistance @ 14257-14495 was taken out in early March, 2012.

Since that time price has pulled back into what has now become support.  A break below 14257 would set up a re-test of the next line of support @ 13344-13520.  Currently price continues to hold support above 14257 so this is positive.


Wiltshire 5000 vs MSWorld Index


Just by way of comparison, I have included a chart of the Wiltshire 5000 (in black) overlaid with a chart of the MS World Index (ex U.S.) to show the relative outperformance of the U.S. vs the rest of the world.

You can see the two tracked pretty close until late in 2009 where the U.S. began to outperform the rest of the world.  That has continued to this day and is the primary reason why I always caution against using the EK Provident Fund C account funds as opposed to investing with your own brokerage firm outside the EK offerings.  I continue to hold my personal investment capital in U.S. stocks and have easily outperformed the EK offerings over the past 2 years as a result of being able to "target" specific asset classes, regions and opportunities.


Euro

Having said all the above, I thought it interesting to look at the Euro.

You would expect (given the horrible state of affairs in Europe currently) the Euro to be collapsing into a pile of dog doo-doo.  It is interesting to note quite the opposite and is probably the only thing that has a "positive" spin in Europe currently.

The Euro reached a low in Jan 2012 at previous support (126.28; closing low was 126.75) and has rebounded into a zone between 130-134.58  It is currently below the declining 200 day moving average (135.28) and appears undecided as to whether to break the 130 level downwards or the 134.58/200 day moving average upwards.

The "safe" bet remains to the downside but until a decisive break of support (130.00) or resistance (134.58) the Euro is stuck in a "coin-toss" range.


Bottom Line:

The markets continue to display a huge difference in performance between European markets (horrible), Emerging markets (neutral) and U.S. markets (fairly good).  Those able to target investments towards U.S. asset classes have done well since Sept 2011.

Unfortunately the Emirates A+B accounts do not allow for such targetting.  The equity funds offered are centered around the MSCI World Index as their benchmarks therefore contain broad exposure to Europe as part of their investment mandate.  This is the reason the Provident Fund equity accounts have gone no where over the past few years (as per my U.S. vs the World divergence chart since late 2009).

Having said that, it is important to try to make the best of a bad situation as that is the hand we are dealt.  As I described on the ACWI ETF chart, we are caught between key support and key resistance.  We are currently at the lower end of that consolidation zone so the closer we are to that key support the less chance we have of losing significant capital in the event Europe implodes this summer.

As such, my strategy going forward is as follows:

1)  I will maintain my current 50% Equtiy/50% USD cash position as my short term ACWI charts (not shown today) are in a downtrend.  We are between key support and key resistance so those levels are my key areas of interest.

2)  When my short term charts move to positive, I intend upon increasing my equity exposure to 75% AS LONG AS PRICE STAYS ABOVE KEY SUPPORT @ 44.83-45.10 as discussed previous.  The closer the current correction comes without breaching that key support area the better.  I always enter a trade thinking about the downside "how much am a possibly going to lose"; the less the better!

3)  Once in the new position, should price subsequently breach key support @ 44.83-45.10 it must be assumed a new significant decline is in the ofting.  Should this occur, I would be forced to switch my holdings back to 100% USD cash.  Fortunately given the current low levels the loss would not be significant.

4)  Should price continue to advance above key resistance (48.12-48.51) I would be tempted to switch my 75% equity holding into a 100% position.  I would then use this level as my "go/no go" for positioning.



As of today I remain in a 50% Equity/50% USD Cash position as I indicated in my last post:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity: 50%


I will post any changes I make to my accounts as they occur.

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ecamquestions@gmail.com

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