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Signs of a recovery

By Colin Twiggs
June 11th, 2015 4:30 p.m. AET (2:30 a.m. EDT)

Advice herein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.


Performance Update

The S&P 500 Prime Momentum strategy returned +25.06%* for the 12 months ended 31st May 2015, outperforming the S&P 500 Total Return Index by 12.55%. Macroeconomic and volatility filters continue to indicate low to moderate risk and we maintain full exposure to equities.

The ASX200 Prime Momentum strategy returned +1.49%* for the 12 months ended 31st May 2015, compared to +9.93% for the ASX200 Accumulation Index. Underperformance is primarily attributable to the sharp fall in Sirtex (SRX) on March 17th. Concentrated portfolios are always more volatile because of high exposures to individual stocks, but they also tend to perform better in the long-term — which is why we recommend a minimum investment horizon of 5 years.

Splitting your investment between the ASX 200 and S&P 500 strategies would enhance diversification and help to reduce volatility.

* Results are unaudited and subject to revision.

Market Insight

North America

A strong blue candle on the S&P 500 daily chart suggests that the latest correction is over. Penetration of the descending trendline would confirm. 21-Day Twiggs Money Flow recovery above zero would strengthen the signal. Recovery above 2120 would signal an advance to 2200*. Look for confirmation from the Dow Jones Industrial Average and Transport sector.

S&P 500 Index

* Target calculation: 2120 + ( 2120 - 2040 ) = 2200

CBOE Volatility Index (VIX) at 13 indicates low risk typical of a bull market.

S&P 500 VIX

Dow Jones Industrial Average also shows signs of a recovery. Reversal above 18000 would confirm the correction is over. Breakout above 18300 would offer a target of 19000*. 13-Week Twiggs Money Flow holding above zero continues to signal a healthy primary up-trend. Breach of support at 17500 is unlikely, but would warn of a correction to test primary support (and trendline) at 17000.

Dow Jones Industrial Average

* Target calculation: 18300 + ( 18300 - 17600 ) = 19000

Bellwether transport stock, Fedex surged to test primary resistance at $184. Rising 13-week Twiggs Money Flow indicates buying pressure. Breakout would offer a target of 204* — a positive sign for the economy.

Fedex

* Target calculation: 184 + ( 184 - 164 ) = 204

A long tail on Canada's TSX 60 suggests strong support at 855. Recovery above the descending trendline would indicate the correction is over. A 13-week Twiggs Momentum trough above zero would signal continuation of the primary up-trend, while breakout above 900 would offer a long-term target of 1000*.

TSX 60 Index

* Target calculation: 900 + ( 900 - 800 ) = 1000

Europe

Germany's DAX is testing support at 11000. Recovery above the descending trendline would indicate the correction is over. Declining 13-week Twiggs Money Flow continues to warn of selling pressure, but penetration of the descending trendline would also suggest that buyers are back in control. Reversal below 11000 is unlikely, but would offer a target of 10000*.

DAX

* Target calculation: 11000 - ( 12000 - 11000 ) = 10000

The Footsie is testing support at 6700/6750. Declining 13-week Twiggs Money Flow continues to warn of selling pressure, but penetration of the descending trendline would suggest the return of buyers. Breakout above 7100 would confirm a primary advance with a long-term target of 8000*. Reversal below 6700 is unlikely, but would warn of a primary down-trend.

FTSE 100

* Target calculation: 7000 + ( 7000 - 6000 ) = 8000

Asia

The Shanghai Composite broke 5000. The situation appears artificial, considering current economic data, and I believe the accelerating up-trend will lead to a blow-off.

Shanghai Composite Index

* Target calculation: 3500 + ( 3500 - 2500 ) = 4500

Retracement on Japan's Nikkei 225 Index respected support at 20000, suggesting an advance to 22000*. Oscillation high above zero on 13-week Twiggs Momentum signals a strong primary up-trend.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 - 18000 ) = 22000

India's Sensex is testing primary support at 26500. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure, however, and recovery above zero would strengthen the signal. Respect of support and penetration of the descending trendline would suggest another primary advance. Breach of primary support is less likely, but would warn of a primary down-trend with support at 23000*.

SENSEX

* Target calculation: 26500 - ( 30000 - 26500 ) = 23000

Australia

"Unemployment has fallen to a one-year low of 6 per cent in May as an estimated 42,000 jobs were added to the economy last month." ~ ABC News

The ASX 200 found support at 5500 after solid employment numbers and a rally in US markets. Recovery above 5650 and the descending trendline would indicate the correction is over, suggesting a fresh advance. Breakout above 6000 is still some way off but would offer a target of 6500*. Reversal below 5450 remains as likely, however, and would warn of a test of primary support at 5120/5150.

ASX 200

* Target calculation: 6000 + ( 6000 - 5500 ) = 6500

Moderate decline of 13-week Twiggs Money Flow indicates medium-term selling pressure, typical of a secondary correction not a reversal.

The Banking sector [XBAK] dragged the index lower over the last two months, but now faces solid support at its two-year low of 83. Twiggs Momentum (13-week) bearish divergence warns of a down-trend, but recovery above zero would suggest otherwise.

ASX 300 Banks

The law locks up the man or woman
Who steals the goose off the common
But leaves the greater villain loose
Who steals the common from the goose.

~ Medieval English ditty from Jeffrey Sachs The Impunity Trap

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