Weekly Market Wrap: 21 Dec 2012

This regular column serves as a review of general market conditions and covers stocks, commodities, precious metals, currencies and bonds.

Stocks

The stocks section of this week’s Market Wrap focuses on two important Asian stock markets: South Korea and China.

South Korea Composite Stock Price Index (KOSPI)

As the chart below shows, the KOSPI, or the South Korea Seoul Composite Index, began an uptrend in late September, making a series of higher highs and advancing more than 20%.

A 2 year (daily) chart of the South Korea Seoul Composite Index (Click on the chart for a larger version)

A 2 year (daily) chart of the South Korea Seoul Composite Index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Approximately 60% of South Korea’s economic growth is dependent on exports, therefore the index is a decent barometer of the health of the global economy. And since around 60% of the nation’s exports go to China, it also provides some insight into the health of the Chinese economy.

To some, a rise of over 20% means that an asset is in a bull market, however in order to sustain its advance the KOSPI will need to break above its April high at 2050 (blue horizontal line). If the KOSPI’s uptrend continues beyond 2050 it would help confirm that the Chinese economy has turned the corner and begun a new bullish phase.

Shanghai Stock Exchange

The Shanghai Stock Exchange, which is the world’s 6th largest stock market by market capitalization, reached 3471.44 in early August 2009. However as the chart below shows, it then began a long downtrend and has since lost more than 37% of its value, in a move that ran contrary to the rise of the S&P 500 (blue line) and other major stock indices.

A 4 year (daily) chart of the Shanghai Stock Exchange Composite (Click on the chart for a larger version)

A 4 year (daily) chart of the Shanghai Stock Exchange Composite (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The Shanghai index remains in a bear market but its recent jump did manage to break through the steep downtrend line from the 2011 high and this could be the first sign that it is trying to form a bottom.

Commodities

Corn

As the chart below shows, between 1 June and 21 August this year the price of corn rose more than 50% when the US was struck by the worst drought in more than five decades.

A 1 year (daily) chart of corn (Click on the chart for a larger version)

A 1 year (daily) chart of corn (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

For the past few months corn has been trading in a range between 716 and 773, however a more favorable outlook, including the expectation of rain, triggered a breakdown in the price. Corn sliced through the 716 area, which has twice acted as support, suggesting further weakness lies ahead.

Precious metals

Gold

The gold market continues to consolidate following its peak at $1,923 in September 2011. Resistance is the blue downtrend line and strong support can be found at around $1,525 (horizontal line).

A 2 year (daily) chart of gold (Click on the chart for a larger version)

A 2 year (daily) chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Following its peak in early 2006 at $728 gold consolidated for around 16 months, and after it hit a peak of $1,033 in early 2008 it consolidated for around 17 months, therefore the current 15 month consolidation is nothing out of the ordinary.

Much of the recent weakness in gold (and silver) can likely be explained by opportunistic short sellers taking advantage of the lack of liquidity in the market. Knowing that the thinly traded market would not be able to absorb large sell orders, the bullion banks and other large institutional players sell large volumes of futures contracts in order to push the price down. They are then able to cover their short positions by buying contracts from investors who are spooked by the move and sell because the price has moved against them.

These temporary market takedowns can represent good buying opportunities for savvy long-term investors, and it’s not unusual for the physical price and the paper price of gold to diverge, particularly as the physical market remains tight.

Currencies

Japanese Yen

For recent analysis of the Japanese yen see Monday’s article: The time to short the yen is now – but the dollar isn’t the best way to a big profit.

New Zealand dollar

A bullish growth outlook has helped the New Zealand dollar to rise 7.7% versus the US currency this year. In a recent interview Bill English, New Zealand’s Finance Minister, said “people seem to see our prospects as reasonable and therefore they’re buying the currency”.

The nation’s annual economic growth is projected to accelerate to 3.2% in 2013, the fastest since 2005, and up from an estimated growth rate of 2.3% this year.

Bonds

For recent analysis on the state of the government and corporate bond market, see yesterday’s article: Bond bubble could see the sky-fall.

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