ASX 200 Is Oversold

Today, the ASX 200 Index has moved into oversold territory.  See the chart below covering Oversold Moments over the past 4 years.

In a recent client note, I illustrated my prediction of the ASX 200 falling to 4,170 around the mid-July 2012 timeframe.

This level was breached today, 2 months earlier than I expected.

My work suggests that the ASX 200 is now creating a base before embarking on a new tactical rally. I have found this current “set-up” similar to previous occurrences where the ASX 200 and the Shanghai Composite indices have troughed 2-4 months before other Western markets.

Combining the “oversold” reading with increasing bearish sentiment, consensus estimates for the ASX 200’s fiscal year 2013 include a P/E ratio of 10.6, a dividend yield of 5.5% and a Price to Book ratio of 1.5.

The ASX 200 is now in a range that I refer to as a “fertile investing habitat”. The Forecast Earnings Yield of the ASX 200 is 9%, which 6% above the 10 Year Aust. Commonwealth Government Bond (ACGB) yield.

Recently, I have written that the Australian equities market is not an “outright” nor a “raging” BUY whilst the 10 Year ACGB yield remains below “at-call” deposit rates and especially the Reserve Bank’s Cash Rate.

Currently, the RBA’s Cash Rate is 3.75% and the ACGB yield is 3.27%. Should the RBA cut rates by another 50 basis points, this yield curve will soon become normal again.

With all this theory and probability, I am only expecting a “tactical” rally, which may zigzag its way higher into November 2012.

Beyond this timeframe, our longer-term cycle work will see us lighten positions as the end of the calendar year nears.

Sometimes, markets move to where they can do the most damage and presently, that direction may very well be UP!

Oversold ASX 200 Moment – 4 years

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