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Chartered

FortrendSecuritiesWealthManagement

JoelHewishisanInvestment/FinancialAdviseratFortrendSecurities.Theopinionsexpressedarehis
own.

EditionNo.6
26thMay2010

Bottom Line: Markets around the world have been soldoff on significant volume and ferocity. We now
viewtheS&PASX200asbeingintheearlystagesofitsnextlegdownwithinthecontextofalargerdegree
bearmarket,whiletheUSS&P500isheadingquicklyinthesamedirection.Expectationsareforsignificant
declinesinthelargemajorityofassetclasses,goldandpropertyincluded.Weviewthelikelihoodofmost
sharemarketsfallingbelowthelowsof2008/09withinthenext2yearsasveryhigh.Expectationsarealso
for further material weakness in the Australian dollar versus the US dollar. Our expectation is for the
AustraliandollartotradeintherangeofUSD$0.50andUSD$0.60,butanAUDbelowUSD$0.50wouldnot
come as a surprise during this same period. If you have not moved to manage these risks and take
advantageofthisopportunity,youneedtoaskyourselfWHYNOT,andbegintodosomethingaboutit!!

Chart1USS&P500

ItappearstheS&P500maybeetchingoutaheadandshoulderspatternasitstoppingformation,
howeveralotmorehastooccurbeforethispatterncanbeconfirmed.
A head and shoulders formation is an extremely reliable trend reversal pattern, but only if the
patternisconfirmed.
It is still far too early for one to assume this is how the market action will play out but it is a
possibilityworthconsidering.
Fortheheadandshoulderspatterntobeconfirmed,wewouldexpecttoseeonelastbounceoff
thenecklinesupport,asindicatedbythebluelinearound1,060,recoveringuptothehighsseenin
January 2010, with the market turning back down thereafter and breaking through the support
level.
Itmustbestressedthatthisisonlybeinghighlightedasapossibility.Abreakbelowtheneckline
onsignificantstrengthwouldmostlikelyprovethisassumptionincorrect.
Themarketisinaveryinterestingposition,withsupportaround1,060offeringthepotentialfora
rallyoffthislevel,ifthebearswillallowit.
It should be noted that for the moment, sentiment indicators are showing significant signs of
pessimism and a number of indicators appear to be indicating short term oversold positions,
indicating that a likely bounce could be at hand. However for the most part, supply has been
overwhelming.
A short term rally may occur overthe next week or so, but forour mind, it would only serve to
offerachancetosellintostrength.
TheS&P500isyettoconfirmthatithasbegunthelargerdegreedowntrend,howeverintimewe
expectthatthepriceactionwillshowthatwehavenowseenthehighsforthisbearmarketrally,
withsignificantlylowerpricestoensue.

Chart2S&P500Acloserlook


TheabovegraphshowsthepriceactionoftheexchangetradedfundSPY,anETFwhichtracksthe
performanceoftheS&P500.ThepurposeforshowingthischartasopposedtotheactualS&P500
chart is because the exchanges dont provide volume for the index within the time required to
publishthisreport.Buttheabovechartisanextremelygoodproxyfortheactualindex.
Last nights selloff appears to show the conclusion of a 5 wave move down. There is a good
possibilitythatwemaygetabounceintheshorttermasbuyershavemovedintosupportpricesat
1,060,whichisakeylevelofsupport.
However,nothingiscertain.Thebounce,ifitcomes,wouldonlylikelyserveasaconvenientplace
tosellintostrengthasthe5wavemovedownappearstoaddweighttoourthesisthatthelarger
degreetrendforthismarketisalsodown.

Chart3S&PASX200



Basedonthepriceactionoverrecentweeks,weformtheviewthattheAustralianS&PASX200
has now concluded its bear market rally which has been in place since March 2009. The break
belowsupportof4,500onincreasingstrength,asdepictedbytheOscillator,andthesubsequent
rejectionat4,400,inoureyeshasconfirmedtheendoftheuptrendandthecommencementof
thenextphaseinthelargerdegreedowntrend.
Althoughthetrenddownhasbegun,itisimportantthatinvestorsunderstandthatwildswingsin
prices, both up and down, are likely to occur. But for the most part, the downward moves will
outweightheupwardmoves.
Onefurtherpointshouldbemade.AccordingtoourElliottWavecount,theS&PASX200hasnow
commenced either Wave C or Wave 3 down. According to Elliott Wave theory, these 2 waves
containthestrongestpricemovesinthedirectionofthetrend.
Itis,therefore,notunreasonabletoexpectpricedeclinestooccurquickerandstrongerthanthe
pricesdeclinesexperiencedduringthefirstphaseofthebearmarketbetween2007and2009.
Fortheshortterm,4,000appearsthenextlogicalplaceforapauseorshorttermbounce.

Chart4FederalReserveBankofSt.LouisM1MoneyMultiplier



The above graph outlines the M1 Money Multiplier as tracked by the St. Louis branch of the
FederalReserve.
It is an extremely important graph, but it takes some explaining. It shows why deflation in the
UnitedStatesisaverylikelyoutcomeand,unfortunately,whybailoutsandmoneyprintingwillnot
beabletoputafloorundertheeconomyuntilthemarkethascleared.
Tounderstandwhatthisgraphisfirsttellingus,onemustunderstandhowmoneyiscreatedand
whatBernankeistryingtoachievebyprintingmoney.
TheUnitedStates,likeAustraliaandeveryotherwesterneconomyoperatesafractionalbanking
system.Inshort,foreverydollarthatiscreatedanddepositedintoabank,thebankwillbeforced
bylawtoretainafractionofthisdepositasareservewiththeremainingamountlefttobelent
out.Thatisifweassume$100iscreatedanddepositedwithabank,thatbankwouldberequired
to hold a fraction of it back as a reserve. If we said the reserve requirement was 10%, the bank
would be free to lend out $90. That $90 would then be used to purchase something, lets say a
house,anditwouldthenbetransferredfromtheborrowertothevendorandthevendorwould
then deposit that $90 with the bank where the bank could then lend out 90% of the $90, being
$81. Eventually this cycle is repeated again until the bank receives $81 on deposit, where it is
required to hold 10% on reserve and is then free to lend out another $72.90 or 90% of the $81
deposited.
That is forthat$100 thathasbeen createdbythe FederalReserve,wehave actuallycreated an
additional$90+$81+$72.90=$243.90ineithernewmoney,orrather,credit.
Whilethisisaverysimplisticexplanation,inreality,notallofthatmoneyactuallygoesbackinto
newdepositsasquicklyasoutlinedaboveasitisspreadaroundvariousformsofconsumptionand
investment.
The money multiplier effectively tracks how many times that new $100 that is created is turned
into new money or credit through the fractional banking system. The higher the multiplier, the
moretimesanew$100iscreated,throughthefractionalbankingsystem,fromtheoriginal$100.
Obviouslythehigherthemultiplier,themoremoneythatiscreated,themoreaccessiblemoneyis,
thebettertheeconomyrespondstostimulus.
But,whenthemoneymultiplierisbelow1.0,thisshowsthattheeconomyhasallthedebtitcan
handle and new money that is created, even at extremely low interest rates, is not circulating
throughthesystemtocreatenewcrediti.e.monetarypolicyisnolongerworking.
When this happens, central banks have a serious problem on their hands meaning that the end
game of the Ponzi economy is before them and no longer can they stimulate an economy by
enticingborrowerstoborrowmoneyandspend,becauseborrowerssimplyhaventgottheability
ordesiretodoso.
Unfortunately,thisistheveryleverthatBernankeandtheFederalReservehavebeentryingtouse
tokickstartconsumptionandtheeconomy,butitisnotworking.
InfactitisthisveryreasonwhyIbelieveitwasactuallynotthestimulusandmoneyprintingwhich
helped lead to the recent stabilisation (not recovery) in the United States, but it was in fact the
reduction in the number of subprime loans from late 2008 through to March 2010 and the
decreaseinloandefaults(seeEdition5,Chart5).
Ofconcernnowisthenumberofnewloansresettingtohigherinterestratesover2010and2011.
Europeisprovidinguswithaninsightintothelackofunderlyingconfidenceinassetmarketsandinvestors
are beginning to come to terms with the fact that efforts by central banks and government officials are
unlikely to resolve the fundamental structural problems which have been masked by years of flawed
economictheory.

Phase2ofthisbearmarkethasbegunanditisgoingtobequiteanexperience.

Thegreatestuncertaintyprovidesthegreatestopportunity.

Assuchwestronglyencourageyoutocontactustodiscussyourportfolio,howitispositioned,howyou
canmanagetherisksandprosperduringtheseuncertaineconomictimes.

WehopeyouhaveenjoyedthiseditionofCharteredandfoundthecontentofinterest.Ifyouwouldlike
metoanalyseaparticularmarketorchart fromatechnicalpointofview,pleaseemailyourrequeststo
jhewish@fortrend.com.auandwewillendeavourtolookatanyrequestsinupcomingeditions.

Inthemeantime,ifyouwouldliketoarrangeatimetodiscussyourportfolioandsomeofthestrategies
whichcanbeusedtohelpyounavigatetheprevailingmarketconditions,pleasedonothesitatetocontact
me.

Untilnexttime,haveagreatfortnight!!!

JOELHEWISHB.Bus(Bank&Fin),GDipAppFin,GCertFinPlan,SAFin
Investment/FinancialAdviser
FORTRENDSECURITIESWEALTHMANAGEMENT
AustralianFinancialServicesLicenceNo.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 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 licenced Investment or Financial Adviser before acting on any of the information provided in this
publication.

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