War in Europe

By Colin Twiggs
August 30th, 2014 11:00 a.m. AEST (9:00 p: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.

Research & Investment: S&P 500 Performance

The S&P 500 Prime Momentum strategy had a good month, gaining 5.98% in August. The strategy has been running live for ten months, since November 2013, and returned 15.46%* for the period, compared to 15.96% for the S&P 500 Total Return Index. A sell-off of momentum stocks affected performance since April, but macroeconomic and volatility filters indicate low risk typical of a bull market and we maintain full exposure to equities.

Results for the ASX200 Prime Momentum strategy are only available on Tuesday — the second trading day of the new month.

* Results are unaudited and subject to revision.

Europe and the markets

Vladimir Putin has escalated the conflict in Eastern Ukraine with new incursions of tanks backed with artillery, anti-aircraft missile systems and up to 15,000 Russian troops. Intent on seizing as much territory as possible, he is banking on the US/European coalition responding with another slap on the wrist. Each weak response has only made Putin bolder. But where he may miscalculate is that the coalition is aware that its "stick-and-carrot" policy has failed and will be looking for a new approach.

Willingness of the Europeans to endure immediate economic pain in the belief that this will avert a long-term calamity is yet to be tested. Success will depend on France, Spain and Italy's support for their Northern and Central European neighbours, who face a more immediate threat.

A significant step-up in sanctions is likely and the initial response from European markets will be negative. Sanctions are a two-edged sword and likely to hurt Europe almost as much as they do Russia. But NATO rearmament in the medium-term would somewhat offset the initial cost. Never underestimate the stimulus effect of war on local industry — provided the war is fought outside one's borders

Germany's DAX is running into stiff resistance as it approaches 9750. And 13-week Twiggs Money Flow below zero warns of selling pressure, threatening a reversal. Retreat below 9250 would strengthen the signal and failure of support at 8900/9000 would confirm a primary down-trend.

* Target calculation: 9000 - ( 10000 - 9000 ) = 8000

Dow Jones Euro Stoxx 50 reversal below 3100 and 13-week Twiggs Money Flow below zero would add further weight to the (bear) signal.

* Target calculation: 3000 - ( 3300 - 3000 ) = 2700

The S&P 500, unfazed by recent developments in Europe, broke resistance at 2000 to signal an advance to 2100*. A 21-Day Twiggs Money Flow trough above zero indicates rising (medium-term) buying pressure. Reversal below 1990 is unlikely, but would warn of another correction.

* Target calculation: 2000 + ( 2000 - 1900 ) = 2100

CBOE Volatility Index (VIX), shown here on a ten year chart, indicates low risk typical of a bull market.

Shanghai Composite Index, responding to PBOC stimulus, is testing resistance at 2250. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout would confirm a primary up-trend, signaling an advance to 2500*. Respect of resistance is less likely, but would suggest further consolidation.

* Target calculation: 2250 + ( 2250 - 2000 ) = 2500

The ASX 200 is testing resistance at 5650. Continued strength in US and Chinese stocks would improve the chance of an ASX 200 breakout, suggesting an advance to 5850*. Bearish divergence on 13-week Twiggs Money Flow — shown here on a monthly chart — continues to warn of long-term selling pressure. But failure to cross below zero would negate this and completion of another trough above zero would indicate that buyers are back in control. Reversal below 5450 is unlikely, but would warn of a test of primary support.

* Target calculation: 5650 + ( 5650 - 5450 ) = 5850

That's all from me for today. Take care.

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