8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 1/8

 Chartered

Fortrend Securities - Wealth Management 

  Joel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the Wealth

Management division. The opinions expressed are his own and do not represent those of Joe Forster or 

the International Advisory division.

Edition No. 16

29th September 2010

Bottom Line: Financial markets appear to be in the later stages of their corrective patterns which have

 persisted for the past 3 months. Major equity markets have either completed a topping formation, are

completing a topping formation or are already well entrenched in the next phase of their downtrend. Global equity markets are now showing similar extreme technical and bullish sentiment readings to those

displayed just prior to market tops registered in April 2010, January 2010, May 2008 and October 2007. The

technical and investor sentiment evidence now overwhelmingly supports the resumption of the next leg

down in the not too distant future. This next leg down should produce swift and broad declines. Limited 

time remains to protect yourself and profit from this opportunity!! 

Chart 1 – US S&P 500

•  The S&P 500 continued its climb higher over the past fortnight and according to a report from

Bloomberg 27 September 2010, the S&P 500 is now on track to register its best September

performance since the 1930s.

•  While this may be a bullish sign to some in the market, perversely it may have actually produced

quite the opposite.

•  The rally from the lows in July now appear to have set the market up nicely for another leg lower

and potentially a very significant decline in the not too distant future.

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 2/8

•  Although the market has rallied quite significantly over the past 3 months, it still remains

approximately 6.5% away from its recovery high registered 26 April 2010.

•  Of concern now, however, is that the rally has now pushed numerous technical and sentiment

indicators into high alert territory, irrespective of the fact that the market still remains a good

margin below the April 2010 recovery high.

•  While the market can still move higher from here, these same indicators have only ever lined up

together with such unitedness in periods just prior to recent years tops and the subsequent

declines.

Chart 2 – US S&P 500 – A closer look

•  The S&P 500 is hovering just above the 61.8% Fibonacci retracement level at 1,140.

•  The next level of resistance above 1,140 is at the 78.6% Fibonacci retracement level at 1,175,which also lines up with the previous resistance level that arose 5 trading days after the 6 May

2010 flash crash. 

•  Can the S&P 500 get to 1,175? Yes it’s possible. Can it get to the highs of 26 April 2010 and

beyond? It can’t be ruled out but it is highly unlikely.

•  When assessing the probabilities of which direction the next major move is likely to occur, the

overwhelming evidence lines up towards the downward direction. 

•  Once again, perverse as it may seem, with every new move higher, it brings with it new evidence

that the next significant move will be towards the downside and it could be quite some move.

•  So what is the evidence I talk about? Well I’ll discuss that in just a moment. 

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 3/8

Chart 3 – S&P ASX 200

•  The S&P ASX 200 also appears to be in the later stages of its corrective pattern with volume having dried up

significantly during the past fortnight and the Oscillator still failing to register levels of strength that would

be consistent with the resumption of a larger degree uptrend.  

•  Like the S&P 500, the S&P ASX 200 also remains some margin below the 15 April 2010 recovery high.

Chart 4 – S&P ASX 200 – A closer look

•  The S&P ASX 200 is trading just below the 61.8% Fibonacci retracement level of 4,700 with the

78.6% retracement level around 4,845.

•  Essentially what the above suggests is that the S&P ASX 200 is now moving into an area of 

significant resistance.

•  The likelihood that the S&P ASX 200 will peak at some point between where it is now and 4,845 is

extremely high.

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 4/8

Chart 5 – American Association of Individual Investors Sentiment Survey

(Source: www.aaii.com)

•  The above graph shows the number of AAII members who are bearish. This indicator is used in a

contrarian way.

•  When the number of members that are bearish approach lows of 25% or less, this has often

preceded significant declines just days and weeks later. The idea is that with sentiment at bullish

extremes and bearishness at extreme lows, the odds that there is no one left to continue to buy

shares is extremely high as those who are bullish are already invested.

•  On 16 September 2010, the survey produced a result of just 24.3% bears, a level consistent with

the readings of 23.0% bears registered on 31st December 2009 approximately 3 weeks before

commencing the declines in January 2010, 24.7% on 8th

May 2008 approximately 2 weeks before

the market commenced its +50% declines into March 2009, 25.3% on 4th

October 2007, just 5

trading days before the all time market high and 22.3% on 22nd

February 2007, the very day the

market peaked and commenced a decline of approximately 7% during the still unfolding uptrend.

•  As with everything, these readings must be put in context of the overall picture and unfortunately

the overall picture is not flattering.

•  For each of the extreme readings of sentiment registered in February 2007, October 2007 and

December 2009, they all occurred within the context of a larger degree uptrend.

•  What is of concern this time is that the most recent reading of 24.3% bears registered on 16

September 2010 has occurred within the context of what very much appears to be a Wave 2countertrend rally. This reading, unfortunately, is shaping up to occur within the same context as

the May 2008 Wave 2 countertrend rally reading, just before the onset of the Wave 3 declines

which saw the S&P 500 decline some +50% over the next 10 months.

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 5/8

Chart 6 – S&P 500 Mutual Fund Cash Holdings

(Source: Elliott Wave International) 

•  Longer term readers of Chartered would be familiar with this chart. Once again this chart is an

extremely reliable indicator of investor sentiment. When cash levels are high, this is a reflection of 

fund manager pessimism. The higher the levels of cash, the more fuel on the sidelines which can

be invested into the market to fuel a bull market. Conversely when cash levels are low, fund

manager sentiment is extremely bullish and this is reflected in the fact that fund managers are fully

invested in the stock market.

•  History has shown that cash levels as a percentage of assets around 10% or more have almost

always coincided with a price bottom in the S&P 500, while cash levels around 5% or less have

almost always coincided with market bottoms.

•  In 2000, just before the dot com high, S&P 500 mutual fund managers had cash levels of just 4%, in

September 2007, just before the all time S&P 500 high, cash levels had decreased to an all time low

of just 3.4%. In April 2010, this same indicator came in with a reading of 3.4% before easing slightly

during the sell-off in between April and May 2010.

•  More recently in August 2010, this same indictor has now matched the all time low of 3.4% and

given the rise into September, looks on track to create a new all time low.

•  Simply put, there is no fuel left in the tank to see the market move significantly higher and this

reading once again has occurred with the S&P 500 still some margin below the April 2010 recovery

highs. This is consistent with my view that the rally from June 2010 to date has been nothing more

than a countertrend rally which has occurred within the context of a larger degree bear market.

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 6/8

Chart 7 – US Dollar Index

(Source: www.tradersnarrative.com, 24 September 2010)

•  Longer term readers will also be aware that it is my expectation that the US dollar should

appreciate against most major currencies during much of the next 18 – 24 months as risk aversion

is expected to increase during this time period. 

•  It now appears that sentiment in the USD is at a level consistent with my expectations of a decline

in financial markets and a rally in the USD. 

•  In June 2010, according to the Daily Sentiment Index from trade-futures.com, bullishness in the

USD had reached extreme levels of 98% bulls. It was no coincidence that given this extreme bullish

reading that a turnaround in the USD to the downside ensued and the USD has been in a corrective

ABC pattern since. 

•  More recently though, the USD Daily Sentiment Index has now reached just 5% bulls following the

correction since early June 2010 and now appears to be setting up nicely for a new rally to begin in

the USD in the not too distant future.

•  This fits very nicely with my investment thesis and could prove a factor in halting the seemingly

unstoppable AUD’s move to parity, especially if the expected sell-off in global equities markets

begins shortly.

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 7/8

Chart 8 – 2-Year Treasury Note Yield and the S&P 500 Stock Price Index

(Source: Haver Analytics, Gluskin Sheff)

•  The above graph shows the US 2-Year Treasury Yield on the left axis and the S&P 500 Share Price

Index on the right axis.

•  This indicator has often been used by economists and strategist to identify periods of risk and

potential future moves.

•  According to Gluskin Sheff Chief Economist, David Rosenberg, the S&P 500 and 2-Year Treasury

Note Yield have moved with a positive correlation of approximately 75% over the longer term.

•  Since 2009 the two have diverged in performance. That is the yield on the 2-Year Treasury has

declined while the S&P 500 has increased.

•  Similar obvious divergences occurred between 2006 and 2007 and again in 2003 and 2004.

•  While the indicator does not provide a clear sign as to which market is likely to move in which

direction in order to close the divergence, it does show one clear message.... either the stock

market is a short or the Treasury market is. 

•  Given the context with which these two markets have diverged, it would be reasonable to assume

that the odds favour the stock market declining.

The evidence continues to mount in favour of a significant sell-off and the resumption of a larger degree

bear market. I can warn, highlight and alert you to these warning signs, but ultimately it requires you to

take the first step to seek advice to ensure your portfolio is positioned to not only manage these risks but

also be in a position to prosper from this opportunity.

Investors should be prepared to be nimble and adjust their portfolios to suit the conditions which prevail.

As such I strongly encourage you to contact us to discuss your portfolio, how it is positioned, how you

can manage the risks and prosper during these uncertain economic times.

Divergence

Divergence

Divergence

8/8/2019 Edition 16 - Chartered 29th September 2010

http://slidepdf.com/reader/full/edition-16-chartered-29th-september-2010 8/8

I hope you have enjoyed this edition of Chartered and found the content of interest. If you would like me

to analyse a particular market or chart from a technical point of view, please email your requests to

 jhewish@fortrend.com.au and I will endeavour to look at any requests in upcoming editions.

In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies

which can be used to help you navigate the prevailing market conditions and profit from this opportunity,

please do not hesitate to contact me on 03 9650 8400 or 0401 826 096.

Until next time, have a great fortnight!!!

JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin 

Investment / Financial Adviser  

FORTREND SECURITIES - WEALTH MANAGEMENT  Australian Financial Services Licence No. 247261

Chartered is a fortnightly publication from Fortrend Securities – Wealth Management and is provided for the purpose of general information only. The views and opinions expressed in the publication are those of Joel 

Hewish and do not necessarily match those views of Joe Forster and Fortrend Securities – International Advisory. This publication is provided as general information only and does not take into account your 

personal circumstances, aims and objectives and should not be considered personal advice. You should first consult a licensed Investment or Financial Adviser before acting on any of the information provided in this 

publication.