The ASX 200 found support at 6450/6500 followed by a hesitant rally: a candle with a long tail followed by a short-bodied evening star. This resembles a typical dead cat bounce. Breach of 6450 is likely and would warn of a decline to test support at 6000.
Gerard Minack in a recent report suggested that Australia is likely to go into recession if the saving ratio increases. For the past few years, consumption has been growing at a faster rate than disposable income as households dig into savings to maintain their lifestyle.
Households may continue this behavior because of the wealth-effect (they feel asset-rich but cash-poor) but are likely to reverse sharply if housing and equity prices fall. Which is what we are witnessing at present.
In our view, the housing decline is likely to continue despite the RBA cutting rates. While rates may be attractive, job prospects are looking shaky. Loan approvals are falling.
Business investment is falling.
Job ads are about to go over a cliff. Trade tensions with China will add to our woes.
Public funded infrastructure construction is slumping.
Credit and broad money supply growth are approaching 2009 GFC lows.
And our iron ore tailwind is dying fast. Iron ore spot prices have fallen off a cliff. Breach of support at 95 is likely and would warn of another decline to test support at 80.
I plan to further increase the level of cash in our Australian Growth portfolio.