“A prudent speculator never argues with the tape. Markets are never wrong; opinions often are.” ~ Jesse Livermore
The ASX 200 broke resistance at 6800, signaling a fresh advance with a short-term target of 7200. Declining Trend Index peaks still warn of secondary selling pressure at present. Expect retracement to test the new support level at 6800. Respect of support would confirm the advance.
But divergence from fundamentals is growing.
NAB cut their GDP forecast to 1.5% in their November Forward View.
Housing markets in Sydney and Melbourne have recovered somewhat, but building approvals for houses remain 21% below their 2017 high and 57% for apartments. Construction activity is likely to remain low.
Exports are strong, boosted by increased LNG exports, but iron ore prices are falling. Currently testing short-term support at 80, our long-term target for iron ore is $65/metric ton.
Business investment has slowed, causing wages to stagnate.
Retail sales weakened as a consequence, contracting for the first time since the early 1990s.
Annual credit growth slowed to 2.5%, the lowest since 2010.
Banks were spooked last week by AUSTRAC pursuing Westpac for 19.5 million breaches of anti money-laundering and counter-terrorism regulations. The ASX 300 Banks index broke support at 7600, completing a double-top reversal, but this week they consolidated in a narrow range. Expect retracement to test resistance at 7600. Declining peaks on the Trend Index, however, continue to warn of selling pressure. Respect of resistance would confirm the decline, with a target of 6800.
The ASX 200 REITs index broke out of its descending triangle, signaling another advance. Financial markets are searching for yield.
The ASX 300 Metals & Mining index penetrated its descending trendline, suggesting that a base is forming. Expect another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400. The Trend Index penetrated its descending trendline but a peak near zero would warn of continued selling pressure.
We shouldn’t argue with the market but we should wait for confirmation; bull and bear traps are common. Investors, bear in mind that market risk remains elevated. I leave you with this quote from Westpac in their recent credit update:
For businesses, the economic backdrop has become more challenging. The global economy is slowing and household spending is soft. In this environment business investment in the real economy has lost momentum across the non-mining sectors – which will weigh on credit demand.
….and on jobs, wages growth and household spending.
We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.