Iron ore prices are weakening, with spot testing support at $62/tonne. A Trend Index peak below zero would complete a bearish outlook, warning of strong selling pressure. Breach of support at $58 would confirm a primary down-trend.
The ASX 300 Metals & Mining index is testing resistance at 4000, remaining in a strong up-trend despite weaker ore prices.
Australian banks face a tough time over the next year or two but the ASX 200 index continues to strengthen despite weakness in its largest sector. A Twiggs Money Flow (13-week) trough at the zero line signals interest from buyers and breakout above 6150 would signal a primary advance, with a target of the October 2007 high at 6750.
Since my February 13th newsletter flagged rising market volatility, market risk has been at the amber level, with 21-day Twiggs Volatility fluctuating between 1.0 and 2.0 percent on the S&P 500. A large trough that respects the 1.0 percent level, as in 2015 below, would be sufficient warning to cut back exposure to stocks because of elevated risk.
Yesterday, Volatility (Twiggs 21-Day) on the S&P 500 retreated below 1.0 percent, suggesting a return to the lower-risk green zone. Breakout above 2800 would signal reviving investor confidence, and an advance to test 3000.
The ASX 200 found support at 5950/6000, a bullish sign. Large bearish divergence on Twiggs Money Flow (13-week) continues to warn of selling pressure but breakout above 6150 would signal a fresh primary advance. Breach of 5950 is unlikely at present, but would warn of a test of primary support at 5650/5750.
The ASX 300 Banks decline continues, heading for a test of its 2016 low at 7200.
The ASX 300 Metals & Mining index breakout above 4000 is likely, offering a target of 4200.
The broad index looks bullish but I have two concerns. First is the weak banking index, representing the largest sector in the ASX 200. Second, iron ore prices are weakening. Spot prices are testing support at $62/tonne. A Trend Index peak below zero looks likely, and would warn of strong selling pressure. Breach of support at $58 would signal a primary down-trend.
GDP growth recovered to 3.1% for the year ending 31 March 2018, on the back of strong exports, but the overall report card for the economy remains weak.
Russell 2000 Small Caps Index is leading the US recovery. The iShares Russell 2000 Small Caps ETF broke through resistance at 160, signaling a primary advance with a target of 175. According to Dow Theory, small capitalization stocks typically lead the advance in stage 3 of a bull market, with large caps having exhausted their gains.
But Charles Dow did not have to contend with technology stocks which are a law unto themselves. The Nasdaq 100 broke through resistance at 7000 and is currently retracing to test the new support level. Respect is likely and would signal a primary advance with a target of 7700.
The S&P 500 is further behind, headed for a test of resistance at 2800. Breakout would signal a primary advance with a target of 3000.
Bellwether transport stock Fedex is also recovering, having broken resistance at 256. A bullish sign for the broad economy. Expect a test of resistance at 274/275.
The Nasdaq 100 broke through resistance at 7000. Expect retracement to test the new support level but respect is likely and would signal a primary advance with a target of 7700.
The S&P 500 respected support at 2700. Follow-through above 2750 would signal another test of 2850.
Volatility is falling and a dip below 1.0% would suggest that the market has returned to business as usual.
Banks continue to threaten mayhem, with the ASX 300 Banks Index headed for a target of its 2016 low at 7200.
The second biggest industry group, Metals & Mining Index, however, remains in a primary up-trend. A long tail on the ASX 300 Metals & Mining weekly chart reflects support at 3800 and another test of 4000 is likely.
The ASX 200 continues to display a large bearish divergence on Twiggs Money Flow (13-week), warning of selling pressure. Breach of 5950 would warn of a test of primary support at 5650/5750.
I expect a gradual decline in the index unless mining falters. In which case all bets are off.
10-Year Treasury yields retreated below 3.0 percent after threatening a bond bear market for the past week.
Breakout above 3.0 percent would complete a large double bottom reversal in the secular down-trend.
Rising bond yields would be expected to weaken demand for gold as the opportunity cost of holding precious metals increases.
The other major influence on gold prices, the Dollar, continues to strengthen. A strong Dollar would weaken the Dollar-price of gold.
The Dollar Index is rallying to test resistance at 95. Penetration of the long-term descending trendline in April suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.
Spot Gold retraced to test the new resistance level at $1300/ounce — the former support level. The declining Trend Index indicates selling pressure and respect of the descending trendline would warn of a test of primary support at $1250/ounce.
Australian gold stocks fared better, with the All Ordinaries Gold Index finding support at 4950 and the rising Trend Index signaling buying pressure. Respect of the long-term trendline would confirm another primary advance.
The reason is not hard to find. The Australian Dollar is at a watershed, testing primary support at 75 US cents as the greenback rallies. A Trend Index peak below zero would warn of strong selling pressure. And breach of primary support would signal a decline to 69/70 US cents.
Offering a potential bull market for Aussie gold stocks.
Banks face continued selling pressure as the Royal Commission progresses. The ASX 300 Banks Index broke medium-term support at 7700, confirming the primary down-trend and a target of the 2016 low at 7200.
Financials are the largest sector in the ASX 200. Materials, consisting of mainly Metals & Mining are second.
Source: S&P Dow Jones Indices
The ASX 300 Metals & Mining Index remains in a primary up-trend but threatens a correction to test the long-term rising trendline. Respect of the trendline is likely and would signal continuation of the up-trend. Breach of 3400 is unlikely but would present a bearish outlook, not only for Metals & Mining, but the entire ASX.
The ASX 200 is correcting to test medium-term support at 5950. Breach would warn of a test of primary support at 5750 but respect of support is just as likely. Breakout from the triangle on Twiggs Money Flow (13-week) will indicate the likely direction.
Now that 93% of S&P 500 stocks have reported first quarter earnings we can look at price-earnings valuation with a fair degree of confidence. My favorite is what I call PEMax, which compares Price to Maximum Annual Earnings for current and past years. This removes distortions caused by periods when earnings fall faster than price, by focusing on earnings potential rather than necessarily the most recent earnings performance.
Valuations are still high, but PEMax has pulled back to 22.78 from 24.16 in the last quarter. Valuations remain at their highest over the last 100 years at any time other than during the Dotcom bubble. Even during the 1929 Wall Street crash (Black Friday) and Black Monday of October 1987, PEMax was below 20.
While that warns us to be cautious, as valuations are high, it does not warn of an imminent down-turn. Markets react more to earnings than to prices as the chart below illustrates.
The last two market down-turns were both precipitated by falling earnings — the blue columns on the above chart — rather than valuations.
While it is concerning that prices have run ahead of EPS — as they did during the late 1990s — consolidation over the past quarter should allow earnings room to catch up.
The S&P 500 has broken out above its symmetrical triangle and we are now witnessing retracement to test the new support level at 2700. Volatility is falling and a dip below 1.0% would suggest that the market has returned to business as usual.
Twiggs Money Flow remains a respectable distance above the zero line and is flattening out. Breach of primary support at 2550 seems unlikely.