Credit growth in Australia is falling (with help from the Royal Commission) and broad money growth is anemic, below the lows of the GFC, warning that the economy is close to a contraction.
Banks are particularly vulnerable because of the falling housing market. The bubble threatens to burst after a long expansion and the RBA is low on ammunition. How many rate cuts do you think they have left in reserve?
The ASX 200 Financials Index is testing long-term support at 5400. Declining Momentum peaks warn of a bear market. Breach of support is likely to lead to another decline, with a long-term target of 4000.
The Resources sector is in far better shape but the ASX 200 Materials Index is also slowing, with a strong bearish divergence on 13-week Momentum. Reversal below primary support at 11000 would confirm a primary down-trend.
The ASX 200 is testing resistance at the former band of primary support between 5650 and 5800 (revised up from 5750). The rally could go further, possibly as high as 6150, but this is a bear market and the probability that this rally will change that is low. Respect of resistance is likely and reversal below 5650 would confirm the bear market for Australian stocks. Initial target for a primary decline is 5000.
Our hope is that China rescues us with another massive stimulus spend, as in the GFC, lifting the resources sector. But hope isn’t a strategy.
I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.