Chartered

Fortrend Securities - Wealth Management

Joel Hewish is an Investment/Financial Adviser at Fortrend Securities. The opinions expressed are his
own.

Edition No. 4
28th April 2010

Bottom Line: With the S&P 500 down 2.34% and the Euro Stoxx down 3.67% last night on solid volumes, all
the necessary ingredients are now in place for both the S&P 500 and S&P ASX 200 to have put in place a
market top. While we are not trying to pick the market top, there is overwhelming evidence that suggests
this could very much be the market top that we have been expecting for this bear market rally. Both
markets were trading within key historical support/resistance zones, with the S&P 500 having been turned
away from the 61.8% Fibonacci retracement level. We have targeted these resistance zones as likely areas
for market tops and to date they continue to repel markets down. With sentiment and market strength
indicators continuing to register declining support for significantly higher prices, the risks that we have seen
the highs for this bear market rally are significant. If you have not moved to manage these risks already,
you need to ask yourself WHY NOT, and begin to do something about it!!

Chart 1 US S&P 500

Positive earnings results have continued to support the US market over recent weeks, with
approximately 80% of the near 180 companies that have reported to date beating analysts
estimates.
The S&P 500 continued its push into the 1,200 to 1,300 resistance zone with the uptrend
continuing its move to higher prices.
 As yet the 61.8% Fibonacci retracement around 1,229 has yet to be breached, with prices getting
very close but failing to reach it.
We have indicated that this is a very significant level of resistance for the S&P 500 to move higher
and last nights price action has supported this view.
With analysts appearing slow to realise the significance of the inventory restocking cycle, the trend
for continued earnings surprises to the upside is likely to remain a factor for the time being.
However, with a renewed focus on European sovereign debt problems, in particular Portugal,
these concerns maybe enough to offset the positive sentiment that recent earnings results have
had on the market.

Chart 2 S&P 500

With the S&P 500 moving very close to the 61.8% Fibonacci retracement around 1,229, it has since
been repelled.
We are looking at this price action intently to make a better assessment of likely future direction.
Chart 3 - S&P ASX 200

Until last night the S&P ASX 200 had recently diverged from the S&P 500 and has now turned lower
over the past week.
The oscillator has declined significantly during this period and a test of the uptrend line (green line)
around 4,800 is now on the cards.
A break below the uptrend line may indicate a change in trend.
A bounce off this uptrend line would likely signal further strength in the short term and a
continuation of the uptrend.
If a break occurs, an assessment of the break will be warranted to determine the probabilities of
this short term downtrend developing into something more significant.
Investors should remain nimble.

Chart 4 S&P ASX 200 A closer look

 The S&P ASX 200 has been trading within the 4,800 to 5,200 resistance zone since March 2010.
This is the third time over the past 7 months in which this has occurred, only to see the market turn
down shortly after. Institutions obviously believe this area is an attractive place to take profits and
unload stock.
It is not the first time that we have indicated that this appears to represent the price action of
institutional distribution, that is, controlled selling to retail investors.
More recently the market has put in place a clear lower high over the past week signalling that a
test of 4,800 is now likely on the cards.

Chart 5 S&P 500 12 Month Trailing Dividend Yield

(Source: Standard & Poors, Robert Shiller)

The above graph shows the historical 12 month trailing dividend yield for the S&P 500 since 1881.
This graph can be used as a measure of market valuation.
Over that time the average 12 month trailing dividend yield for the S&P 500 has been 4.37%, the
median yield has been 4.30%, the lowest yield was 1.11% in August 2000 and the highest yield was
13.84% in June 1932 (Standard & Poors, Robert Shiller).
With the current S&P 500 12 month trailing dividend yield currently at 1.85%, there is clearly a lack
of value based on this measure.
In fact, dividend yields around 3% or less have often preceded significant market turning points.
While markets are considered forward looking and valuations are based on future expected
earnings, this measure of valuation cannot be discounted, as this is a measure of valuation based
on actual achieved earnings and paid dividends.
We only need to look at the recent performance of analysts forecasts to see that we shouldnt
overplay the significance of their estimates during uncertain times. The recent forecasts for US
earnings this reporting season being a case in point.
Chart 6 Portuguese 5-Year Credit Default Swap Spreads

Time will tell the significance of this chart, but with such a movement in price in such a short time
frame, and given the concern that still surrounds Greeces sovereign debt issues, I thought it
important to highlight what has recently occurred in Portugals credit default swap market.
The above chart shows the significant rise in the cost of protection against Portuguese sovereign
debt default since March 2010 and in particular over the past couple of weeks!!!
Given the sell-off that occurred in January 2010, when the full extent of Greeces debt problems
came to light. Could the recent increase in perceived risk surrounding Portugals sovereign debt
over shadow the positive corporate earnings coming out of the United States?
Time will tell but a move of such significance in such a short period of time should not be ignored.

All major markets suffered a significant sell off last night as concerns arose that the European sovereign
debt problems could spread into a sovereign debt crisis. The problem which policy makers and investors
face is that investors are now demanding a higher return for the higher risks that they are taking. At the
same time, however, this demand for high returns only serves to exacerbate the problems, as higher
funding costs compound the debt problems. As we saw with the sub-prime crisis over recent years, this
type of problem can create negative feedback loops, if it is not contained early. Negative feedback loops
then create contagion risks as the cost of funds for other heavily indebted parties increase on the back of
increased market risk. That is the problem we faced during the first leg of the global financial crisis
between 2007 and 2009. And it could very much be a risk that we face going forward if the uncertainty
surrounding Europes sovereign debt crisis is not contained very shortly.

From a technical point of view, we have been warning that the markets where looking suspect and
consider the following points as a clear indication that markets were running out of steam:

Mutual fund cash levels are now at just 3.5%, equal to their all time low which occurred in July
2007. There is a clear lack of buying power idle on the sidelines to support increasing prices.
The 10 day moving average of the Chicago Board of Exchange Equity Put/Call ratio has fallen to
0.45, meaning that the number of call options written is twice that of put options written. There is
clearly an over exuberance to the upside recovery story.
 The S&P 500s 12 month trailing dividend yield is now 1.85%, much lower than the yields registered
prior to the 1929 market top and 1987 market top. As yield has an inverse relationship with price,
valuations could be seen as being excessive.
The S&P 500s trailing 12 month price to earnings ratio is at 23.4%. This is a level that the measure
usually reaches before a market top.
The VIX, a measure of stock market volatility as measured by the value of options premiums, was
settling around 16 17, about the same area the VIX was before May 2008 when the market
declined relentlessly for the next 10 months.
The S&P 500 has been significantly repelled from the 61.8% Fibonacci retracement level of 1,229.
The S&P ASX 200 has once again failed to gain any meaningful traction within its resistance zone
between 4,800 and 5,200.

As such it is our view that all the necessary ingredients are in place for the recent market highs to be the
highest levels we could see for some period of time and continue to recommend investors turn their
attention to how to manage these risks.

We hope you have enjoyed this edition of Chartered and found the content of interest. If you would like
me to analyse a particular market or chart from a technical point of view, please email your requests to
jhewish@fortrend.com.au and we will endeavour to look at any requests in upcoming editions.

In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies
which can be used to help you navigate the prevailing market conditions, please do not hesitate to contact
me.

Until next time, have a great fortnight!!!

JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin

Investment / Financial Adviser
FORTREND SECURITIES - WEALTH MANAGEMENT
Australian Financial Services Licence No. 247261

Chartered is a fortnightly publication from Fortrend Securities Wealth Management and is provided for the
purpose of general information only. The views and opinions expressed in the publication are those of Joel
Hewish and do not necessarily match those views of Fortrend Securities International Advisory. This
publication is provided as general information only and does not take into account your personal
circumstances, aims and objectives and should not be considered personal advice. You should first consult
a licenced Investment or Financial Adviser before acting on any of the information provided in this
publication.