ASX 200 rallies but LT bearish

The Australian economy is creaking. This is not a time for the Treasurer to concern himself with a balanced budget, laudable as that long-term (LT) goal may be.

Household consumption is slowing, with falling car sales and international travel. Housing investment is about to go over a cliff. This time China is unlikely to rescue the damsel in distress with another record stimulus spend.

It’s time for the government to go big on infrastructure spending. Not school halls or pink batts but real infrastructure like transport and communications investment (5G for example) that will boost long-term GDP growth. We are going to need government (and private) infrastructure to offset the sharp fall in housing investment and prevent a serious contraction.

The ASX 200 rallied off support at 5400 and is headed for a test of resistance at 6000. What could go wrong? This is a bear market and one strong rally is not going to change that. Respect of resistance at 6000 is likely and would warn of another test of primary support at 5400. Breach of support would offer a target of the 2016 low at 4700.

ASX 200

Banks are vulnerable because of the falling housing market. The ASX 200 Financials Index is testing long-term support at 5400. Bullish divergence on the Trend Index indicates buying pressure but I believe this is secondary in nature. The primary trend is down and breach of 5400 would offer a LT target of 4000.

ASX 200 Financials Index

The Resources sector is in far better shape but bearish divergence on the  ASX 200 Materials Trend Index warns of LT selling pressure. Reversal below 10500 would confirm a primary down-trend.

ASX 200 Materials

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.