Market Comments, Tues, 22/12/09

The market (XAO) had a strong move up today, +1.4%. We're now into the holiday period and volume has lightened off. Today was about half the 50-Day Average. Such light volume allows for greater volatility which we saw today.

The Advance/Decline Ratio was reasonable without being spectacular, 1.4/1. But UpVol/DownVol was a bearish 0.76/1. A bit odd. It's rare for the UpVol/DownVol to record a bearish number on such a strong day.

Just to add to the oddity, Small Ordinaries was up only 0.9%, while the 50 Leaders was up 1.5%. Again, strange to find risk aversion dominating on such a strong day.

I've been concerned that the Ozzie Dollar has had a trend change from up to down - but the market hasn't followed suit.

It would be normal now for the Ozzie, after a big drop like its had, to have something of a reaction rally up - and take the XAO up with it. So the XAO could break out to the upside if that happens.

I've been looking for evidence that the currency drop is having an effect. And I've found it in, at least, the Health Care Sector (see chart above). Health Care, dominated by CSL, Resmed and Sonic Health Care, is highly dependent on overseas earnings. So when the Ozzie drops, that improves returns to these companies when they repatriate earnings back to Australia.

We can see in the chart above that the Health Care/XAO Ratio has poked above the 65-Day Moving Average. The only time in this bull rally from March that it has been able to move significantly above the 65-Day MA was back in June/July when the general market was retreating. That is what would be expected. At that time the Ozzie Dollar was also in retreat. The market and the Ozzie were correlated. In such a case, Health Care has a negative correlation to the Ozzie, so that sector moved up in a counter trend move, while the market moved down.

Now, we have Health Care, as expected, moving up while the Ozzie moves down. Again - negatively correlated. But the general market hasn't acted as expected. Perhaps I'm wanting the relationship to be too close and it will happen. Or perhaps something else is operating that I'm not aware of.

Anyway - it would pay to be careful - and take advantage of an upside break-out if it occurs.

Somehow, I think in the medium term, the past relationships will assert themselves. Fundamentally, if the Ozzie is falling, money is being drawn out of Australia. This hurts liquidity and the volume of money available for investing in the stock market. So we should expect the market to fall with the fall in the Ozzie. Perhaps we should be patient and see how it pans out.

Putting it all together, the market was up strongly today - but, perversely, risk aversion was obvious. The Ozzie Dollar is weak which should affect the market adversely. So, I think the risks still lie to the downside rather than the upside.