From overheating Chinese equities to cooling commercial property and consumer spending in the UK, there is plenty to concern the stock market investor. But what are the key indicators telling us?
Chinese investors' enthusiasm for stock market investment has caused the Chinese stock market to rise like a rocket to such an extent that the world and his brother fear a dramatic crash, which Alan Greenspan said, this week, is impending. We don't think there is a financial analyst anywhere who hasn't got the Shanghai stock market on daily watch.
Stock market trends: Beijing determined to bring Chinese market down
Day trading, which was such a unique feature of stock market activity through to the year 2000, is today a major factor in China. In the first quarter this year 8.56 million new stock broker accounts were opened by Chinese investors. This compares to only 5.38 million for the whole of 2006.
Betting against Central Banks is a dangerous business which is exactly what Chinese investors are doing. Government officials and officials of the People's Bank of China have repeatedly organised warnings in the press whilst at the same time edging interest rates up. Their determination to bring this market back down was best explained by Stephen Green, an economist at Standard Chartered Bank in Shanghai, he said "Rate rises could be backed by public statements from senior leaders over the next few days of the risk in investing in shares. We expect the market to fall back next week - and if it proves resistant, Beijing will continue with a thousand small cuts until it does".
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Stock market trends: UK commercial property cools
Two weeks ago in Issue number 544 dated 10th May 2007, we highlighted developing weakness in the UK commercial property market. The stock market real estate sector chart published a fortnight ago, has since developed a more pronounced top. Real estate companies' share prices could, any moment, fall off a cliff. The long-term love affair private investors have had for commercial property may be ending. This week Savill's largest commercial property auction was left with one third of the lots offered unsold. At a smaller auction held by Colliers CRE, two thirds of the properties failed to fall under the hammer.
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Consumers in the UK are visibly weakening. The Daily Telegraph said that Datamonitor recently issued a report showing that the consumer credit market has slowed following a decade of unremitting growth. Ernst and Young say that the number of consumers planning to save, which means spend less, is increasing. Rising interest rates, record levels of personal bankruptcies, the slowing of consumer credit and a propensity to save rather than spend, all dramatically signal that the Bank of England is winning the argument. Stuart Rose, CEO at Marks & Spencer, when reporting a 26% jump in profits for its full fiscal year, also said "We expect the retail environment to become more challenging; competition remains intense and pressure on consumer spending as a result of interest rate rises will also increase".
Our stock market section includes in each issue a short report on our four financial Horses of the Apocalypse. These were carefully selected as indicators which would, in due course, collectively deliver an important signal. In isolation, the signals they send are questionable, but collectively they tell a big story. As yet we haven't had a signal that all four indicators simultaneously supported.
Stock market trends: the key indicators
The white horse - false peace - The Volatility Index (VIX)
Since the middle of March, consolidation has been taking place between 11.2 and 16. A move above or below that range would have very important implications. Below 11.2 complacency will have returned and that would be a positive signal for stock markets. Above 16 would signal much increased risk for the stock market.
The red horse war and destruction The Philadelphia House Market Index
Housing permits fell sharply in April to an annual rate of 1,063,000 from 1,131,000 in March, down 28.9% year-on-year and 80% below 1,798,000 the record figure for September 2005.
The historic predictive quality of the National House Builders Housing Market Index for the future action of the S&P 500 is brilliantly demonstrated by the published chart obtained from Weldon Financial Global Macro Research and Money Management (www.weldononline.com). The 79% correlation since 1996 is extraordinary; if that correlation is to continue, the chart forecasts that the S&P 500 will fall precipitously quite soon.
The black horse famine and unfair trade Dow Theory
The confirmation provided a few weeks ago by the Transports Index on making a marginal new high in line the Industrials strength has, as a result of no follow through and the distinct presence of a top formation, proved unsound. The earlier signal is now unsafe.
The pale horse sickness and death The Inverted Yield Curve
Yield curves are still inverted a reliable signal of a recession to come.
If everything stays the same except the Volatility Index moves into higher territory, then we will have a convincing adverse signal for stock markets.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
