edition 19 - chartered 10th november 2010

8/8/2019 Edition 19 - Chartered 10th November 2010

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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. 19

10th November 2010

Bottom Line: The rise of the S&P 500 above the April 2010 high has now opened up several possible wave

counts. While in the short term this provides a level of uncertainty as to how long the market will continue

to rise before topping, the longer term cautious and bearish view still remains well in place. While the rally from March 2009 has carried further than first anticipated, it still remains comfortably within the bounds of

the bear market rally thesis. The internal strength of global equity markets continues to wane and fails to

confirm the sustainability of recent global equity market increases, while the structural macroeconomic

issues in the western world continue to provide enormous challenges over the next two years. Investors

should continue to use the recent rises as an opportunity to reduce risk and position their portfolios to

profit from this opportunity!!

Chart 1 – US S&P 500

• The rise of the S&P 500 above the April 2010 high has now meant that the previous wave count,

signifying the beginning of the next leg down, has now been invalidated and a new interpretation

of the waves is now necessary.

• While Primary Wave 2, which commenced in March 2009, continues in its advance, the rise above

the April 2010 high has NOT invalidated my secular bear market view. Given the rise above the

April 2010 high, it is my view that the rise since March 2009 to date is a Primary Degree Wave 2



subsequent advance is very difficult to predict, as too is the length of time for the expected final

waves, if indeed they occur.

• It should be remembered that Elliott Wave analysis is a market mapping tool with some predictive

capabilities. Where it is most effective is when the wave count is combined with the weight of

other technical evidence and macroeconomic data to help conceptualise where the market is likely

positioned with regards to its short, medium and longer term trends.

• Just a note on the above chart, some may question where the black coloured labels are placed and

whether or not there is actually a wave that can be depicted. As these labels depict waves of a verysmall degree, the waves are only visible on smaller time frames such as the 4 hour and 2 hour

charts, which are not shown here, but the waves are there.

Chart 3 – S&P 500 Alternative Wave Count

• One possible alternative wave count that could be utilised is a variation on the wave counts as presented

above. The variations of the wave count above have been put forward by other Elliott Wave technicians,whom I respect highly, and the arguments for the above interpretation are convincing.

• In short, they argue that the decline in the bear market actually completed in November 2008 and the

subsequent waves following that market bottom actually form part of a larger double zigzag correction.

• If this interpretation is correct, the market top is just around the corner and it would coincide with a

number of technical (Sentiment and Divergence) and market relationships (Currencies and Commodities)

that appear to support this interpretation of the wave count.

• Time will tell but prudence and risk management should still remain your number one priority in the current

market environment.

• It could also be possible that a double top could have recently been put in place. In this instance we would

look for a break below the 2010 low and for a fall to extend at least 200 points below the July low beforefinding support.

• It should be mentioned that almost no one in the financial media is expecting a decline in the markets at

present and it is exactly this environment which preceded market tops in October and November 2007 in

the US and Australian markets.



Chart 4 – S&P ASX 200

• The S&P ASX 200 continues to take its lead from Wall Street but the performance since the lows in

May 2010 has lagged those of the larger market.

• For the moment I continue to maintain the above wave count, which has been displayed over the

past several months, however, with the more bullish short term wave count of the S&P 500 now in

play, I provide below a potentially more bullish short term wave count alternative. Importantly, the

larger secular bear market should once again take control proving 2011 and 2012 to be extremely

volatile and risky investment propositions.

Chart 5 – ASX 200 Alternative Wave Count

• As depicted above, the more bullish alternative wave count allows for one more pullback and then

a rise to a new recovery high before topping.

• The Oscillator shows the divergent strength of the S&P ASX 200 since August 2009 and the new

highs registered since then.



Chart 6 – ASX 200 Alternative Wave Count – A closer look

• At this stage the Oscillator continues to show divergent strength in the recent price move.

Chart 7 – USD/EURO Cross Rate

(Source: Elliott Wave International, trade-futures.com)

• The performance of global equity markets tend to correlate negatively (inversely) with the

performance of the USD. This is particularly true when looking at the US and Australian equity

markets. It is therefore important to closely monitor what is occurring in the currency market

when analysing what the probabilities are for large movements in both the US and Australian

equity markets.

• Using the Daily Sentiment Index from trade-futures.com, it is possible to see that when sentiment

in the US dollar reaches levels of bearishness of approximately 5% bulls or less, this has tended to

coincide with bottoms in the USD versus the Euro. Bullish sentiment extremes of approximately

95% bulls or above tend to coincide with tops in the USD.

• Given the above relationship and the extremes in sentiment in both equity and currency markets,

it remains extremely difficult for me to be convinced that significant further weakness in the USD

and significant further strength in US and Australian equity markets is likely.



• Furthermore, the decline in the USD against the Euro appears to have completed a 5 wave

decline to complete a C Wave corrective pattern.

Chart 8 – AUD/USD Cross Rate

• If we applied these same sentiment readings to the AUD/USD relationship, the same relationship

holds true and the current positioning of this market is not AUD and equity market bullish over the

medium term.

Chart 9 – 10 Year Irish Government Bond Yield

• In trying to determine what might be the excuse for the next expected pull back or round of

weakness, perhaps it could be the sudden loss in confidence in Irish sovereign debt.

• The above chart shows the yield demanded by investors to purchase Irish Government 10 Year

Bonds. The 10 year bond has been progressively sold-off since May 2010, with momentum in the

declines gathering pace in August and again in October 2010. WATCH THIS SPACE!!



Analysing Secular Bull Markets and Secular Bear markets

Chart 9 – S&P 500 Composite Inflation-Adjusted Regression to Trend

(Source: dshort.com, seekingalpha.com)

• Thanks to the work of Doug Short from seekingalpha.com, the above chart shows the inflation

adjusted performance of the S&P 500 displayed on a logarithmic scaled chart since 1870.

• The following hyperlink http://seekingalpha.com/article/202431-monthly-update-secular-bull-and-

bear-markets, connects you to the article which this chart was pulled from and makes for an

interesting read. The chart is useful in determining whether or not stocks make for a good medium

to long term investment given the current environment and whether or not March 2009 was infact the actual market low in the secular bear market. While the article was written in May 2010,

the remarks are still relevant.

• In short the article makes the following points:

The annualised rate of growth since 1871 is 1.96%, inflation adjusted.

Factoring in the dividend yield you get an annualised return of 6.64%.

The nominal annualised return (not adjusted for inflation) is 8.85%.

Average inflation adjusted returns during secular bull markets averages 415%.

Average inflation adjusted returns during a secular bear market averages -65%.

Adding a regression line to the data series the slope of the regression line equals1.70% annualised.

• Based on this analysis, previous secular bear markets have bottomed at levels of -34%, -59%, -66%,

-58% and -54% below the regression line for an average distance of -54.2% below the regression

line.

• The most recent low in March 2009 finished at just -8% below the regression line, well and truly

short of the shallowest bottom and the average bottom since 1870.



Chart 10 - S&P 500 Long Term Price to Earnings Ratio (CAPM)

(Source: RJ Shiller, Matthew Claassen, seekingalpha.com)

• But the evidence doesn’t stop there. Chart 10 above dates back to the 1880’s and shows thetrailing earnings Price to Earnings ratio of the S&P 500 since that period. At each major secular

bear market low during that period, before the market commenced a new secular bull market, the

trailing Price to Earnings ratio for the S&P 500 has always receded below 10x and has twice

approached P/Es closer to 5x. • At the low of March 2009, the Price to Earnings ratio fell to around 13x not even close to breaking

below 10x let alone the near 5x Price to Earnings ratio that has occurred at two of the previous

secular bear market lows.

• With the current trailing P/E around 20x, this valuation appears well in excess of previous P/E highs

in past bear market rallies and appears to be approaching levels more consistent with secular bull

market peaks. While the above two charts provide a convincing argument that the lows in this secular bear market have

not yet been seen, when you combine the evidence of those two charts with other important

characteristics associated with bear market lows, you need to take notice. And what are the other markers

that come to mind? Well at each major secular bear market low, the S&P 500 trailing dividend yield has

been in excess of 6% dating back to 1880. It was just 3.2% at the March 2009 low and it is now closer to

1.85%. Furthermore, S&P 500 mutual fund cash levels have always peaked at approximately 10% or higher.

S&P 500 mutual fund cash levels peaked at just 6% at the March 2009 low and are now close to an all time

low at 3.5% (3.4% is the all time low). And finally the wave structure and internal strength of the S&P 500’s

rise since March 2009 is not consistent with the onset of a new secular bull market.

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.

I hope you have enjoyed this edition of Chartered and found the content of interest. If you would like meto analyse a particular market or chart from a technical point of view, please email your requests to

[email protected] 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.

edition 19 - chartered 10th november 2010

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