The Australian market missed out on the Santa Rally that often runs from around Christmas into early New Year. The U.S. and Europe experienced solid moves through that period and - in typically laconic Aussie style - the ASX has caught up a little after a laid-back start to the year.
As we push further into 2012, global markets appear to be developing more of an appetite for risk and many are wondering which of the two major sectors in the Australian market could be the better bet.
Australian heavyweights are mostly in the Banking or Mining/Minerals sectors. Of course, we have other large companies like Telstra but our telecommunications companies are small compared to the overseas majors.
There are strengths and weaknesses for both sectors.
Banks are seeing shrinking loan books and this will likely lead to a strategy of margin preservation. Opinions vary at to whether finance is becoming more expensive to obtain for the banks but you can be sure the banks will defend their turf (and margins) vigorously. They have also flagged a reduction in staffing levels to try to reduce costs and maintain profit levels.
Our miners are competing well on the world stage, are continuing their massive infrastructure investment and demand is likely to remain strong in the foreseeable future (unless we see a major shift in the landscape like Europe failing, debt markets freezing or another GFC-style event). They are also struggling with a higher dollar, which adds more spice to the mix.
These fundamental issues can be discussed ad nauseum but chartists like me prefer to look for what's moving. I have produced two sector charts below - XFJ and XMM - which are indices tracked on the ASX that illustrate the overall performance of the stocks that comprise them. The number of stocks in each sector is not equal but the weightings they are given evens out the bumps and makes comparisons reasonable. We are not looking to trade the indices themselves, rather trying to spot movement and hence performance. Having said that, you can trade these indices with certain instruments but a discussion of this is best left for another day.
Chart 1 indicates the major range on the XFJ in the last 12-months, with the bottom in May and the top in August, 2011.
The August low was followed by upside strength to around the 50% level (or half-way point) of the 2011 range. The last six weeks has seen sideways movement, followed by a retest of the 50% level. Currently the market has broken back under this 50% level but we do have a series of higher bottoms, which suggests the sector is holding its own with bulls that have not as yet been able to push out. This 50% level will be a key factor throughout the month of February.
Chart 2 shows us that the XMM sector topped in April and bottomed in late December, 2011. It has moved to 25% of its 2011 range in a steep climb upwards since Christmas and looks to have produced a more solid base in the form of a double bottom.
In short, the XFJ fell less and has rallied further but is now hitting an important technical level. The XMM has bottomed more recently and while it is also hitting technical levels, there may be more potential in this index, especially if the XFJ fails to cross the 50% level. The trend line momentum is certainly stronger on the XMM.
The job of the trader is to find opportunities within these sectors that offer the potential for a reward that is worth the risk.
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