Subject: Today from MORNINGSTAR.

We looked at the ASX Materials index last week, highlighting not only the support on BHP Billiton (BHP), Rio Tinto (RIO) and Fortescue (FMG), but support on the ASX Materials/All Ords chart.

The support on BHP and the support on the ratio chart were important as they marked clear levels that needed to hold. Both support levels held, but it is the support on the relative-performance chart that may be of most interest.

As noted last week, if that support did not hold it would have opened potential for another significant downleg in underperformance. One week's action does not denote a change in trend and no levels of resistance have been broken, but this is a start.

Unfortunately, it does not mean the resource side of our market is about to reverse to the upside -- at this stage it just suggests it may hold up better than the rest of the market.

That may change quickly but we would like to see further positive action and an improvement in "depth" before adopting a bullish view.

We guess the one area in the resource space that may actually push higher is the gold miners. They obviously posted strong performances last week as gold pushed above resistance, but they had been showing glimpses of improvement in recent times.

Gold faces near-term resistance at the $1330 level (the mid-April high), so it may stall in the short term. But if that level can be overcome, gold has the potential to tackle its 2014 high at $1391.4.

There is also resistance at current levels on the silver/gold ratio, adding to the potential for a near-term pause.

As noted in the past, silver has a tendency to outperform gold as gold is rallying -- and, as a general rule, it will fall harder than gold when it is declining.

Silver has been outperforming since early May and the ratio now faces resistance associated with the downtrend that commenced in August 2013 -- that now coincides with the 200DMA.

So there is some significant resistance to overcome, but from a medium-term perspective the outlook continues to improve.

The major Australian banking stocks, with the exception of Commonwealth Bank of Australia (CBA), remain below resistance and a break above recent highs appears unlikely in the short term.

CBA significantly outperformed it peers between late April and late May but that trend has slowed over the past few weeks and a review of the relative-performance chart suggests the outperformance may be coming to a temporary end.

It is unclear which of the banks will take up the lead, but let's keep an eye on National Australia Bank (NAB) as it tests a key level in relative-performance terms.

The ASX Banks index tested resistance in relative-performance terms last week and was unable to break topside.

There are no strong signals here but if we look at the ASX 20 Leaders relative to the All Ords, it does appear as though a significant top was registered in early May (in late May if we use the accumulation indices).

Outperformance is unlikely and this would lend support to the view that the banks may lag.

As for the US market, it had another good week, with advances in all the key indices. The Dow Utilities index outperformed, rising by 4.4 per cent. A review of the major US stocks highlights the potential for continued upside.

What about the VIX? As you know, it broke support on Friday 6 June, which prompted me to declare that perhaps we were entering an environment where stocks could accelerate to the upside.

By the time that report went to print, the VIX had reversed, creating a "false break". It broke to the downside again last Wednesday but closed the week back on support.

It is obviously a very tight situation, although as posted last week, the action in the equity market remains robust and that is the more important indicator at this time.

As for the US T-Bond/S&P 500 ratio, it broke to the downside last week, pushing below support.

Regular readers will know that we have been looking for a break of support in this ratio and in the VIX to signal the potential for the equity market to accelerate to the upside. But we seem to have one or the other breaking to the downside, while the other holds above support.

This casts some doubt on the outlook, but the reason we have been waiting for these two indicators to confirm is we expect that when they do, we could see a "blow-off" move in equities. That is obviously a big call and we are reluctant to confirm it until both these indicators are in synch.

We are left with a situation that suggests the US equity market can continue to move higher, but at this stage the potential for a blow-off is not confirmed.

Investor sentiment, as measured by the AAII (American Association of Individual Investors) is interesting at the moment. According the latest survey, neutral sentiment (expectations that stock prices will stay essentially unchanged over the next six months) is above its historical average for the 24th consecutive week.

The last time there was a similar streak was in 1999 (28 January through 8 July). This is an unusually high level and according to AAII, "the S&P 500 has realized above-average six and 12-month gains following unusually high neutral sentiment readings".

Furthermore, the AAII concludes that "the best contrarian signal occurred not when investors were unusually optimistic or pessimistic, but rather when they described themselves as being neutral".

That's it for this week -- no changes of note. In our market, there is scope for a turn in relative performance for the materials sector, but be aware that this does not yet indicate that price is about to reverse significantly to the upside.

Chart Packs

Use the links below to view the various chart packs.

Australia | The US | Gold and silver

$US vs CHF

0.8939

-0.0005

-0.05