Taking stock of an ASX break-out

The ASX 200 moves past a key threshold, and a rate cut could help it along even further.

PORTFOLIO POINT: As Q1 comes to a close, the ASX 200 has broken above the key 4325 level, and seems set to continue upwards, but the outlook for the Aussie dollar is less rosy.

With a day to go until quarter-end, it seems the institutions are trying to hold the US market together. After all, it has been one hell of a quarter. The US banking index is up 25%, the S&P 500, 11%, the BRIC ETF, 11.18% and the ASX200, 7%.

What does Q2 have in store for us? Well, it’s hard to imagine that Q1 will be repeated, but I suppose we have to keep an open mind. Below is the chart on the Shanghai Composite Index, which has fallen 10% in the last two weeks.

There is an obvious support level at 2200 and if the index can hold at these levels and head higher once again, I will view this as a major positive. But suffice to say, a break of the recent lows would cast doubt on any global recovery.

The Australian dollar has once again fallen below its 200-day moving average and has continued to make lower lows and lower highs. The bulls really have to step up and take control at these levels; a continued break down from here and I think the message to global risk markets will be quite ominous.

On March 21, I recommended aggressive traders look at buying Australian three-year government bond futures. They have advanced 25 points since that date and, while it’s nice to make a correct call occasionally, the more important point to note is that Australian 3-year government bond futures have broken back above their 200-day and 60-day moving averages and broke above resistance at 95.50.

Incidentally, US 10-year bond futures have now closed back above their 200-day moving average, the bond market continues to tell us that world growth is slowing and, here in Australia, rate cuts are on their way.

The next chart is the SPI futures versus the S&P500 futures, which shows the dramatic underperformance of our market for the last several years. You might not be able to see it clearly, but in the last week we have actually outperformed by about 1.8%.

While the down trend is still in place on this chart, it appears to be bottoming out. A weaker Australian dollar and a helping hand from the RBA may be the ingredients that we need to get our index going.

The ASX 200 has broken above the magic level (4325) and the chart gaps at 4428 and 4536 look ripe to be filled. The 60-day is about to rise above the 200-day moving average and the path of least resistance appears to be up.

Yet I feel nervous about jumping on board, because once quarter-end has passed, the US markets might finally have a long overdue correction, Europe is a ticking time bomb and China is looking sketchy.

Maybe it’s time to close my eyes, listen to the market and buy?

Many will remember my notes mid last year when I highlighted that the ECRI Index started going negative, and then Lakshman Achuthan, co-founder and chief operations officer of the ECRI, came out and said the US would go into recession in 2012.

Despite the ECRI leading index rising from -10.70 to -.40 over the last three months, Achuthan is still sticking to his call. Whether you agree with his recession call or not, I urge you to read this nine-page report (a lot of graphs) titled The Yo-Yo Years, which highlights why recessions will be more frequent and why decoupling is a myth.

If you want to learn more about the ECRI approach, click here.

I’ll leave you today with an update on the world’s biggest earth moving company, Caterpillar. Caterpillar, after failing to break its February high, has now broken its February low, and the trend in Caterpillar is now down. This is a worrying sign for world growth.