Volume needed to confirm a bottom

One of the platitudes most constantly quoted in Wall Street is to the effect that one should never sell a dull market short. That advice is probably right oftener than it is wrong, but it is always wrong in an extended bear swing. In such a swing the tendency is to become dull on rallies and active on declines.

- William Peter Hamilton, The Stock Market Barometer (1909).

Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversly, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded).

- Richard Russell, The Dow Theory Today

The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterised by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in prices.

- Russell Napier, Anatomy of the Bear (his study of the four great stock market bottoms of 1921, 1932, 1949, and 1982).

Conclusion - watch volume over the next couple of weeks to determine whether the bottom really is in...

TCL - rock 'n roll 'n then rally?

TCL has been on the nose with the rest of the real asset sector as debt deflation drives a repricing of all assets. However, with its debt levels now down to more manageable proportions, and assuming a security price under $4.00, things are starting to look more attractive. The tea-leaves seem supportive of a foray into the stock...

Firstly a quick look at the fundamentals - gearing on debt to debt plus equity of ~50% is still high, but with senior interest cover in excess of 2.0 times (and EBITDA interest cover 3.1x), it looks fair for the quality of the asset portfolio (and certainly is at the lower end of historically relevant comparisons). At a share price of $4.00, and annualised EBITDA of ~$600m, TCL is trading on an undemanding EBITDA multiple of around 8.5x. This looks pretty fair when you consider peak valuations for airports of 20x and for toll roads of 15x. In summary, with lower debt (ie. less risk) in the business, TCL is still trading at more than a 50% discount to peak valuations. That seems like a good place to start things...

Turning to the charts, look at the weekly price action...

There is a healthy divergence developing in momentum as price made a new low and looks now to retest it.  I'm targetting the $3.86 level which was the terminal point for wave 3 for the current retacement.  Note too the declining volume as price made its low - that is a pretty good signal that wave 5 had run its course and we were past the exhaustion point.

As for upside targets assuming we get a good entry?  I'm expecting a test (and break of the 200 day MA around $5.00 which will also align with the downtrend from the previous absolute highs...at this point I'm thinking that will be wave 1...

Finally, when I work out where and how we should have a look at the long bond but that is another story..

Trading Rules - Bob Farrell

From the legendary Wall Street equity strategist whose career spanned 1950's to 1990's...ten lessons on the markets

1) Mkts tend to return to the mean over time
2) Excesses in one direction will lead to an opposite excess in the other direction
3) There are no new eras – excesses are never permanent
4) Exponential rapidly rising or falling markets usually go further than you think, but the do no correct by going sideways
5) The public buys the most at the top and the least at the bottom
6) Fear and greed are stronger than long term resolve
7) Markets are strongest when they are broad and weakest when they are narrow to a handful of bluechip names
8) Bear markets have three stages – sharp down, reflexive rebound, and drawn out fundamental downtrend
9) When all the experts and forecasts agree – something else is going to happen
10) Bull markets are more fun than bear markets

Commodities versus financials

Like two ships passing in the night, financials and commodities seem to be caught in different currents.

Rummaging through the various sectoral charts, financials are the favoured candidates to lead the way on the expected pullback in XAO.  Have a look at MQG and WBC in particular...

From PazzoMundo

With respect to MQG, the short squeeze has run its course and the lack of volume buyers above $30 doesn't bode well for the near term share price.  Like to see a pullback to ....

Compare and contrast to the commodities sector - at the macro level both the Australian and Canadian markets have turned a corner, similarly the CRB had a key reversal and oil continues to map out a rounded bottom.

Investment luminaries across the moonscape have been entering the commodity trade for a couple of months now (Soros buying potash and oil, Jim Rogers buying gold and agricultural, Harbinger Capital going substantial in Anglo Amercan, Gartman in copper, AUD, and gold to name but a few).  

More recently market talk has been about the Chinese buying physical commodities (copper etc) rather than US treasuries.  Seems plausible, but don't expect them to chase price higher.

Assuming we get a retracement in the broader indices, might be an opportunity to accumulate commodity exposures (eg. BHP under $30) and possibly re-enter financials...in the meantime, there's no reason to get out of the deckchair.  Another pina colada please...

Consolidation on the horizon - XAO to 3300/3400

The markets have had a good run over the last couple of weeks.  A much needed breather is on the cards.  I'm thinking a target area of 3300 to 3400 for the pullback - perhaps the US reporting season will be the catalyst, maybe it's the capital raisings that seem to be emerging in the US - in any event, the technicals ain't looking so good...

1) we have reached resistance in the index and in many leading stocks

2) momentum, volume and RSI have all been diverging into the tail of the rally

3) wave count suggests a pull-back into 'B' of '4' of the primary trend

Notwithstanding the big picture remains a downtrend (which we can expect to rejoin in the second half), next couple of months are signalling continued strength (look to strength in Chinese index, AUD, commodity complex and relative weakness in gold)...for the moment its buy the dips for a trading rally with a target around 4000 for the index.