ASX200 Materials & Energy sectors – shaken not stirred

Rohan Clarke — Tue, 16 Feb 2010 23:41:18 +0000

The commodities complex has taken on an interesting hue of late.

The ASX200 Energy index has been fluffing around since its last high back in October last year.

Technicals – While MACD, momentum and a broken uptrend all suggest lower prices to come, the slow stochastics have crossed on the turn – so we may be close to a bottom? I’d suggest time is on our side, no need to jump in until there is confirmation of a trend change (eg. the MACD crosses to the upside).

Fundamentals – The energy market is a many headed beast – driven by supply/demand, political risks and inflation expectations. I don’t have a strong view nor any reliable indicators that I could point to. Over the long term, global energy demand is headed higher (look at a map of the world at night – plenty of dark patches).

Conclusion – There is always a place for energy in the portfolio but at the moment it’s underweight.

While over to the ASX Materials Index – where the price action has been very tense of late.

Technicals – The uptrend that has been sustained since late 2008 has been at best sorely tested – but more likely broken. Combined with the rolling over and crossing of the MACD, a lower low in momentum and slow stochastics yet to hit value territory and the odds strongly favour lower prices in the not so distant future.

Fundamentals – While the US and Europe plot out their respective ‘recoveries’, for base metals it’s all about China. Depends on who you read – Hugh Hendry, Jim Chanos and others have been banging on about the overcapacity in China’s heavy industry and real estate sector for some time. January’s loan data and the subsequent tightening in liquidity suggest at least that the commissar’s would like the economy to slow. The best indicator there is on fundamental demand in the materials sector is the Baltic Dry Index and it is still heading south.

Conclusion – The technicals are painting a very clear picture here – sell. The risk of the dragon running out of steam is a real and present danger to the commodity sector and if you believe the BDI – then it may well be unfolding now. For mine, the portfolio has but the smallest exposure to the sector (ie. really underweight).

ASX200 sector relative performance – financials on the nose

Rohan Clarke — Wed, 18 Nov 2009 23:08:41 +0000

Scalpel? Tweezers? Face mask on? Maybe a little eucalyptus oil on your upper lip too…

It’s not been a great sign of strength for the global equity markets that indexes like the All Ordinaries, Canada’s TSE and the Russell have not joined the S&P at new highs. Well let’s see what is happening in the bowels of the Australian market to see how this has come about.

First up, the strongest index in the Australian market – XMJ – the materials where the miners reside:

Nothing but uptrend here. It has just pushed through a 50% retracement of its entire downdraft. No signs of weakness here. If the All Ords was just miners we would indeed be at new highs for the year.

So what the hell is happening with energy (XEJ) then?

It topped nigh on 6 weeks ago. The MACD has crossed over, volume is spiking higher on down days/weeks. This index is not the picture of health. But maybe that is sector specific – plenty of analysts have been downgrading their oil price forecasts recently as they ratchet back demand assumptions while increasing inventories.

On the other hand, the small caps are not looking to flash either (XSO):

At least it has tried to retake its highs. But a failure at the recent highs with the MACD also spilling over has this index on the tightrope without one of those long poles (any tightrope walkers out there know the technical name for it?). It is one index that needs to break higher soon – it surely won’t recover so quickly from a second breakdown through its uptrend.

Of most concern are the financials (XXJ):

This index also peaked 6 weeks ago. Given it is a heavyweight in the XJO – it is the primary reason for our market failing to push to new highs. Note the MACD has crossed over, momentum has broken to new lows, and volume has been heavy into the weakness.

Conclusion:

If broader market weakness sets in, it’ll be lead by a breakdown in the financials, but will need materials and energy to follow suit. In the absence of a catalyst, hard to imagine that the market will simply collapse under its own weight. But I guess stranger things have happened.

Data Diary » XEJ

ASX200 Materials & Energy sectors – shaken not stirred

ASX200 sector relative performance – financials on the nose