Rally in stocks nearing an end

Rivkin Investment Team

US equity markets closed marginally lower on Friday, with the Dow Jones Industrials Average (DJIA) dipping 21.42 points (-0.20%) to close at 10,653.56, while the S&P500 closed 4.17 points (-0.37%) lower at 1,121.64.

From a sector perspective, health care (+0.36%), consumer goods (+0.22%), and the utilities (+0.12%) were the only groupings to close the day in the green, while the day’s worst performing sectors were oil and gas (-1.22%), and the financials (-0.74%), followed by the industrials and telecommunications, which both closed 0.48% lower.

From a technical point of view, although the S&P500 and the Dow Jones both closed lower on the day, as evident on the charts below, both markets closed well above their respective intraday lows, evident by the long lower shadows on both candles. Based on Friday’s candle alone, buying support remains firm, increasing the likelihood that the rally which began in early July is not quite finished just yet.

Nevertheless, the choppy overlapping wave structure of the past month suggests that this trend, while up, is weak and corrective. With bearish momentum divergence in place on the MACD histogram, evident by the series of lower highs, we believe that once this rally is complete, the broader downwards trend should reassert itself.

The ASX SPI200 (September 2010) futures contract declined by 14 points in overnight trade on Friday, to be currently at 4515.

To the currency markets, and the US dollar was weaker across the board (with the exception of the Canadian dollar), depreciating the most against the Swiss franc (-0.69%), Euro (-0.69%), and Danish krone (-0.68%). Partly to blame was the weaker than expected US employment report released on Friday, which showed that the US economy shed 131,000 jobs (Non-farm payrolls) in the month of July, compared to a market expectation of a 65,000 decline. The unemployment rate remained unchanged at 9.5%.

The CRB commodity Index was weaker, closing 2.96 points (-1.066%) lower at 274.71. As a reminder, this Index, while comprised of 19 different commodities, is heavily weighted to the energy sector (33%), and crude oil (23%) in particular. Crude Oil for September delivery declined by US$1.31 a barrel (-1.597%) to end the week at US$80.70 a barrel.

Looking more locally and our reporting season continues to pick up steam, with the following companies (among others) due to report this week. Dates are in brackets: Bendigo Bank (9th), Alumina (10th), Bradken (10th), Oakton (10th), Commonwealth Bank (11th), Computershare (11th), Regional Express (11th), Qantas (12th), Transurban Group (12th), Telstra (12th), and Pharmaxis (13th).