Stockmarket Update 31 August 2013

Just a quick end of month update for the month of August 2013.

The market has continued to pull back since my last update 10 August.  It would appear the Dow Jones Industrial Average was the "canary in the coal mine" as all the other indexes in the U.S. have joined the DOW in decline.  Refer to my previous update for cycle/seasonal discussion.

As far as "world markets" are concerned, the ACWI ETF (my benchmark/proxy for the Emirates Provident Scheme Equity funds) topped out 13 August with a daily sell signal generated on Thursday, 15 August.  Year-to-date the ETF has returned +7.61%.

As discussed previous, my expectation would be for markets to fall in Sept/Oct to near levels near the June lows.  Those levels would be around 48.61-49.91 on ACWI (a 6-9% decline from the summer peak).  At that point I expect the markets to recover and achieve new highs before this cyclical bull market ends in 2014-2015.


CLICK ON ALL CHARTS TO ENLARGE


ACWI Monthly:

For the month of August the ACWI index fell 2.29%  The monthly chart remained bullish at the end of August with all technical indicators in alignment.  The RSI (both 2 and 14 period) show a negative divergence and the stochastic has rolled over from overbought.  The MACD histogram displays a negative momentum bar when compared to the month of July (which had displayed a positive momentum bar compared to the month of June).  Price at the end of August did not close below either the 8 or 10 month simple moving average so the long term trend remains bullish.

A clear trend channel is present from the 2009 bottom with the bottom of the trend line currently near 46.00.   Prior to that is a strong area of support in the 48.38-48.67 zone.

The long term remains BULLISH.


ACWI Weekly 3 Year:

The ACWI weekly chart turned slightly bearish this week.  Price closed the week below the Bollinger Band mid-point yet most of the intermediate technical indicators did not corroborate the move.  As such, the indicators could be considered neutral.  Clear negative divergence is shown on the RSI (14), the Stochastic and the MACD.

An intermediate term price channel is shown with the lower channel currently near 49.50.  Also shown is the previous area of congestion (blue box) which could act as short term support over the next few weeks.  This area would be near my previously discussed level near 49.91 (the "6% pullback" scenario).

The intermediate term is NEUTRAL.


ACWI Weekly 1 year:

A closer look at the weekly chart shows levels of support expected during this decline.  The bottom of the previously discussed congestion zone is 48.61-49.26 (weekly close).

In addition I have added a Fibonacci Retracement scale.  During normal pullbacks it is not unusual to sustain a 38-50% retracement of the previous rise.  As shown, this would equate to a pullback to 49.73 (38.2%) to 48.67 (50%).  Note the 50% retracement would equal the previously discussed support area and would be in line with a 9% market decline.


ACWI Daily:

The ACWI daily chart signaled a sell signal 12 August.  As of yesterdays close, that signal remains in force with all technical indicators bearish.  Price has broken previous short term support at 51.70 as well as the 50 and 100 day simple moving averages.  It would appear price intends upon challenging the 200 day simple moving average next (currently at 50.01)

The short term is BEARISH.


Bottom Line:

As previously discussed, we are within a seasonal and cyclical weak period.  It would be expected a pullback of 6-9% would be expected from the top of 12 August on ACWI (concurrent with EK provident scheme equity funds).

It is still my contention we remain within a cyclical bull market (contained within a secular bear market).  I do not expect this bull market to end until 2014-2015.  This is backed up by numerous economic indicators I monitor which indicate the U.S. is nowhere near to entering a recession.  As such, it appears the U.S. (and as a result, the ROW) will continue a slow and gradual/weak and substandard recovery.

Market internals have weakened considerably going into this decline.  However, this bull market continues to be one where the "majority" are still non-believers.  As such, until the final "piling in" begins and the frothy market sentiment begins, there is enough money on the sidelines to support a continued gradual rise.

Ultimately I believe we top out of this pattern in late 2014-early 2015.  This bull market is already "long-in-the-tooth" based upon time but the slow rate of economic recovery would support a longer than normal bull market period.

It is still my contention once this current bull market ends we will experience another significant cyclical bear market decline (in the order of 40-45% decline lasting approximately 18 months) to finally end the secular bear market that began in 2000.  This final "washout" will hopefully decline to such a level that market valuations become attractive once again and usher in the beginning of a new secular bull market.  I expect this new secular bull market to begin in 2017-2018.

In the short term, I plan on increasing my equity exposure on any significant decline into Sept/Oct.  I do not expect that would extend beyond a 70% equity exposure given high market valuations.  My current model exposure within the A+B accounts remains at a tactical 50% equity/50% USD cash position as follows:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


(Obviously actual percentage allocations will fluctuate based upon daily/weekly/monthly based price movements and ongoing monthly A+B account systematic equity purchases.  Please see previous discussions on dollar cost averaging/ongoing equity monthly purchases):

ECAM Investment Strategy Discussion


I have been watching bonds declining with interest.  While speculative due to low interest rates, I am seeing some value in bonds (especially corporate) for the 1st time in a long time (especially in non-US countries).  I expect to move some of my USD cash (no more than 30%) into bonds when it appears the short/intermediate term decline in bond funds has ended.


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