ASX 200 jumps to new high
A strong September jobs report boosted the ASX 200 to a new high of 8355, confirming our target of 8500 for this year.
Labor Market
The Australian economy added a seasonally adjusted 64,100 jobs in September, according to the latest Labour Report, well above expectations of 25,000.
The unemployment rate remained steady at 4.1%.
The surge in jobs was absorbed by an increase in the participation rate to a robust 67.2%.
Aggregate hours worked also improved to 1,968 million in September, a 0.3% increase compared to the 0.2% average over the past 12 months.
Business
Strong labor conditions failed to inspire business confidence, with NAB business confidence (black below) declining to -6 pts in the third quarter.
Wage costs were the number#1 issue affecting business confidence:
The Mining industry (red below) recorded a sharp drop in confidence.
Stocks
The ASX 200 rallied through resistance at 8300, confirming our year-end target of 8500.
The ASX 200 rally was led by a strong surge in Financials, which is headed for a test of resistance at 8600.
The ASX 300 Metals & Mining Index remains tentative, weighed down by falling demand from China. Breach of support at 5600 would warn of another test of long-term support at 5000.
On the other hand, the All Ordinaries Gold Index is testing its July 2020 high at 9500. Breakout would offer a long-term target of 14500. The soaring gold price and falling energy costs have boosted margins, with diesel a substantial cost in extraction and transportation.
Conclusion
A strong jobs report boosted the ASX 200, which recorded a new high of 8355, confirming our target of 8500 for the year.
Strong employment growth suggests that the RBA is unlikely to cut interest rates before next year. Instead, the hawks will be keeping a beady eye on inflation.
Business confidence remains low, with Mining especially hard hit by sluggish demand from China.
The Financials sub-index is headed for a test of resistance at 8600. Breakout would offer a medium-term target of 9200. The All Ords Gold Index is also bullish, testing its 2020 high of 9500. Breakout would offer a long-term target of 14500. Metals & Mining, however, remain bearish.
Acknowledgments
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.
S&P 500 makes new high
Bond markets were closed Monday for Columbus Day, but financial market conditions show further signs of easing. Equities powered ahead, with the S&P 500 making a new high at 5859.
Stocks
The S&P 500 broke resistance at 5800, strengthening commitment to our target of 6000 by year-end. Rising Trend Index troughs signal long-term buying pressure.
The advance is broad, with the equal-weighted index ($IQX) breaking resistance at its previous high of 7300. This offers a target of 7500.
Financial Markets
Moody’s Baa corporate bonds spread narrowed to 1.54%, signaling ready availability in credit markets.
Bitcoin also broke above its six-month trend channel, signaling strong liquidity in financial markets.
Dollar & Gold
The Dollar Index continues to strengthen as Treasury yields rise. This may seem counterintuitive, given the prospect of further rate cuts ahead, but the strong September jobs report has increased bond market concerns about an inflation recovery.
Gold found support at $2,600 per ounce but has hesitated at $2,650. A lower Trend Index peak would warn of another test of support at $2,600. The Shanghai Gold Exchange no longer trades at a premium, with the iAu99.99 contract quoted at 605.04 RMB/gram, equivalent to $2,643 per ounce at the current exchange rate of 7.12 CNY to the Dollar.
Silver is also hesitant, testing short-term support at $31 per ounce.
Crude Oil
Brent crude is retracing to test support at $76 per barrel after Israel confirmed they would not strike Iranian oil targets and OPEC cut their oil demand forecast for 2024 and 2025.
Brent [crude] fell 5%, or more than $4, in after-hours trading following a media report that Israeli Prime Minister Benjamin Netanyahu told the U.S. that Israel is willing to strike Iranian military targets and not nuclear or oil ones…..
OPEC on Monday cut its forecast for global oil demand growth in 2024 and also lowered its projection for next year, marking the producer group’s third consecutive downward revision. China, the world’s largest crude oil importer, accounted for the bulk of the 2024 downgrade as OPEC trimmed its growth forecast for the country to 580,000 barrels per day (bpd) from 650,000 bpd. China’s crude imports for the first nine months of the year fell nearly 3% from last year to 10.99 million bpd, data showed. Declining Chinese oil demand caused by the growing adoption of electric vehicles (EV), as well as slowing economic growth following the COVID-19 pandemic, has been a drag on global oil consumption and prices. (Reuters)
Base Metals
Copper is testing short-term support at $9,500 per tonne after it respected resistance at $9,900. Breach of support would offer a target of $9,250.
Aluminum similarly retreated from resistance at $2,650 per tonne and will likely test support at $2,500.
China’s deflationary pressures also worsened in September, according to official data released on Saturday. A press conference the same day left investors guessing about the overall size of a stimulus package to revive the fortunes of the world’s second-largest economy.
“The lack of a clear timeline and the absence of measures to address structural issues, such as weak consumption and reliance on infrastructure investments, have only increased ambiguity amongst market participants,” noted Mukesh Sahdev, the global head of commodity markets-oil at Rystad Energy. (Reuters)
Iron Ore
Iron ore is expected to retrace to test support at $100 per tonne following a sharp rise after China’s stimulus announcement.
Conclusion
Financial markets show signs of a promising rise in liquidity, with falling corporate bond spreads and Bitcoin breakout above its six-month trend channel. The S&P 500 responded with breakout above 5800, strengthening our commitment to a target of 6000.
Gold and silver display strong uptrends but hesitate in response to a rising Dollar. Increased fears of an inflation rebound are behind the recent rally in long-term Treasury yields and the Dollar. We expect the uptrend in gold and silver to continue, with low real interest rates, whether or not inflation fears fade.
We expect that China will struggle to recover from its current economic slump. The announced stimulus program remains vague and does not address the underlying issue of weak domestic consumption. Deflationary pressures will likely keep a lid on crude oil and industrial metal prices for several years.
Low crude oil prices are also likely to keep inflation in check, leading to low long-term interest rates in the West.
Acknowledgments
-
- CoinDesk: Bitcoin Prices
- Shanghai Gold Exchange: International Gold Contract iAu99.99
- Reuters: Oil falls 2% as OPEC cuts oil demand growth view, China concerns
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.
Stabilizing crude oil prices
Volatile crude oil prices damage production capacity and economic growth and cause volatile consumer price inflation.
At the height of the 2020 pandemic, Nymex WTI crude oil prices fell to an unprecedented low of -$13.10 per barrel as demand dried up and oil storage facilities reached capacity. Producers faced a dilemma: either shut down wells or sell at a loss, effectively paying end users to consume their oil.
The Department of Energy failed to capitalize on this opportunity to replenish the Strategic Petroleum Reserve (SPR), buying only 21 million barrels of crude over four months. US field production fell from 13 million to below 10 million barrels per day as shale producers shut wells rather than produce at below cost. The damage done to balance sheets meant that it took several years to restore production as prices recovered.
Russia’s invasion of Ukraine in February 2022 caused a spike in crude oil prices, with WTI crude peaking at close to $125 per barrel. In response, the Biden administration released 290 million barrels from the SPR. This tipped the oil market into surplus despite OPEC+ production cuts, with Nymex crude prices falling below $75 per barrel.
Shrinking demand from China and rising non-OPEC production, led by the US, has maintained prices at close to $75 per barrel. Now, hostilities between Israel and Iran threaten to escalate to the point that crude oil supplies from the Middle East could be affected.
Joseph Webster from the Atlantic Council argues that the DoE should not hesitate to make further releases from the SPR to stabilize prices in the event of a supply threat. Net crude imports to the US (blue below) have shrunk to 2 million barrels daily from 8 million in 2017, meaning the SPR provides more than 23 weeks of cover if all imports were to be terminated.
Further releases from the SPR would not only help to keep prices low but also stabilize them, which can be highly profitable for the US government. SPR releases under the Biden administration, at an average of close to $90 per barrel, will net about $20 per barrel if the SPR is replenished at current prices—a profit of nearly $600 million.
Conclusion
Releases from the Strategic Petroleum Reserve (SPR) should be used to stabilize crude oil prices in case of an interruption to crude oil imports. This would likely have four benefits:
First, SPR releases would ensure an interrupted supply to industry and minimize the impact on the economy.
Second, replenishing reserves when prices are low would help to maintain a floor under prices and support shale producers, avoiding the shut-down of wells when prices fall too low to cover operating costs.
Third, stabilizing energy prices can be achieved at no cost to the taxpayer. Selling when prices are high and buying when prices are low will likely show a profit.
Lastly, SPR releases would help to keep a lid on inflation. Energy prices impact the consumer price index directly through gasoline and heating prices to the consumer but more significantly through the energy cost component of goods and services. The chart below shows how energy CPI (orange) increased ahead of headline CPI in 2021 and similarly led the decrease in 2022-2023.
Acknowledgments
- EIA: Weekly Stocks – SPR
- EIA: Weekly US Field Production of Crude Oil
- Joseph Webster, Atlantic Council: If the Middle East conflict gets worse, don’t hesitate to tap the US Strategic Petroleum Reserve
- MSNBC: How Joe Biden ‘broke OPEC’ and rewrote the rules for oil trading
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.
China sizzle turns to fizzle
China’s announcement of economic stimulus and hints at an even larger “bazooka” ahead caused a sizzling rally on the Shanghai exchange, with the CSI 300 leaping 20% in the last week of September.
Hong Kong’s Hang Seng Index displays an even steeper rally.
However, a failure to follow through this week with sufficient detail of the stimulus package caused the rally to fizzle, with a sharp correction on both indices. Today, the Hang Seng is testing support at 20500.
Crude Oil
Brent crude reversed sharply as prospects faded for a demand recovery in China.
Treasury Markets
Ten-year Treasury yields stalled and will likely re-test new support at 4.0%.
According to the theory of interest developed by Swedish economist Knut Wicksell, the equilibrium or natural rate of interest—at which inflationary and deflationary pressures are in balance—is when the cost of borrowing is higher than the average return on new investment. This means that the 10-year Treasury yield–the risk-free rate–should be roughly equal to nominal GDP growth, approximating the return on new investment. The chart below shows that the 10-year Treasury yield, at 4.0%, is significantly lower than nominal GDP growth of 5.7% for the 12 months ended in Q2.
With the economy showing little sign of slowing, the likely outcome is either higher long-term interest rates or a build-up of long-term inflationary pressure.
Stocks
The S&P 500 gained almost 1.0% on Tuesday, with a shallow retracement and rising Trend Index troughs signaling buying pressure.
Nvidia led the advance of mega-cap stocks, breaking above its August high, while all seven advanced yesterday.
The equal-weighted index lagged as large caps failed to match mega-cap gains.
Financial Markets
Bitcoin continues to test the upper border of its trend channel. A breakout would be a bullish sign for financial market liquidity.
Dollar & Gold
The Dollar Index is expected to retrace to test new support at 102. Respect would confirm an advance to 104.
Gold is headed for a test of support at $2,600 per ounce, but respect will likely confirm a re-test of $2,700.
Silver is testing support at $30 per ounce, with respect again likely to signal a re-test of resistance at $32.
Metals
Copper retreated in response to China’s disappointing stimulus. Expect a correction to test support at $9,250 per tonne.
Iron ore also reflects disappointment, retreating to $106.30 per tonne.
Conclusion
A disappointing lack of detail on China’s newly announced stimulus led to a retreat in Chinese stocks and global crude oil, copper, and iron ore.
Ten-year Treasury yields are expected to retrace to test support at 4.0%. While yields are likely to remain low as the Fed cuts interest rates, the long-term equilibrium rate is expected to be higher—between 5% and 6%.
Respect of support at 5650 on the S&P 500 confirms our year-end target of 6000, but the advance is exceedingly narrow and precarious.
Gold is headed testing support at $2,600 per ounce, but respect is likely and would signal a re-test of $2,700.
Acknowledgments
- CoinDesk: Bitcoin Prices
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Houthis and the blow-back
Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.
Stocks
The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.
The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.
Financial Markets
Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.
Treasury Markets
Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.
Dollar & Gold
The Dollar strengthened, benefiting from the same flight to safety.
Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.
Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.
ISM Manufacturing
The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.
The New Orders sub-index at 46.1% warns of further slowing ahead.
So does the Employment sub-index at 43.9%.
The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.
Labor Market
Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.
Crude Oil
Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.
Conclusion
Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.
We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.
The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.
Acknowledgments
- CoinDesk: Bitcoin Prices
- Institute for Supply Management: ISM Report on Business
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.
China’s manufacturing contraction
China faces growing push-back from trading partners in its efforts to export its way out of a recession. Dumping excess production in export markets has provoked increased tariffs on manufactured goods such as EVs and commodities such as steel. Declining demand in export markets caused a sharp fall in the Caixin/S&P Global manufacturing PMI for September, with the New Orders sub-index falling to its lowest level in two years.
BEIJING, Sept 30 (Reuters) – China’s manufacturing activity shrank sharply in September as new orders at home and abroad cooled, pulling down factory owners’ confidence to near record lows, a private-sector survey showed on Monday. The Caixin/S&P Global manufacturing PMI fell to 49.3 in September from 50.4 the previous month, missing analysts’ forecasts in a Reuters poll of 50.5. The reading marked the lowest since July last year.
…Even though production expanded for the 11th straight month in September, new orders fell significantly from August’s gain. The sub-index of new orders was the lowest in two years.
While exports have been a bright spot for the economy, new orders from abroad declined at the fastest pace since August last year. Chinese manufacturers said that a deterioration in foreign demand led to the fall in export orders.
Stimulus
George Magnus, former UBS chief economist, author, and commentator on China, writes that Chinese authorities are clearly spooked:
Early last week, the authorities announced the biggest monetary policy stimulus since Covid, comprising interest rate and mortgage rate cuts, reductions in the downpayment for second homes, additional help for state enterprises to buy unsold homes, and 800 billion yuan ($113 billion, £85 billion) of liquidity facilities to allow non-bank financial firms to buy equities and listed firms to buy back their own shares. A 1 trillion yuan ($142 billion, £106 billion) bank re-capitalisation program is also considered likely.
These measures were rocket fuel for stock markets, favouring not least the state enterprises and institutions that constitute much of the ownership of shares. Yet, while the measures generally may bring temporary relief, they will not really boost the economy much. China’s economic problems are not due to interest rates being too high, a shortage of liquidity, or credit supply constraints and China’s property market needs much more than patchy support designed to stop it from adjusting to decades of overbuilding and a bursting bubble.
There are some positives, Magnus notes:
The government is expected to announce during or soon after the Golden Week holiday in the first week of October, a 2 trillion yuan ($284 billion, £212 billion) borrowing programme, split roughly equally between measures to support consumption, and help to alleviate local government indebtedness problems.
The latter amounts to a shift in a limited amount of debt ownership from local to central government, which Beijing has previously railed against, but which is more financial engineering than economic stimulus. The consumption part, however, could have a more meaningful impact. Some is about extending the hitherto sparsely used new-for-old trade-in support for consumer durables and business equipment upgrades. At best this borrows future consumption. The reported introduction of a monthly 800 yuan ( $113, £85) child benefit payment for all but first children, equivalent to about 30 per cent of median post tax monthly income, could certainly give household consumption a shot in the arm.
Stock Market Rally
The Shanghai Composite has made an impressive rally since the announcement.
Shadowed by a similar move on Hong Kong’s Hang Seng Index.
Industrial Metals
Copper broke resistance at $9,500 per tonne after an initial rally caused by a spike in AI data center construction in the US.
Alumini=um shows a similar breakout, above $2,500 per tonne.
Iron ore so far shows a muted response.
Crude Oil
Brent crude remains solidly in a bear market.
Conclusion
Efforts to revive business investment by lowering interest rates are unlikely to have much of a long-term effect when the underlying problem is a shortage in domestic consumption. The private sector will be reluctant to invest when industries already suffer from overcapacity due to insufficient demand.
Overcapacity will also likely worsen as export orders decline due to increased tariffs from trading partners.
Measures to boost consumption through old-for-new “cash for clunkers” exchanges and child benefit programs are a step in the right direction. However, the roughly 1 trillion yuan ($142 billion) is a drop in the ocean compared to the scale required.
Most of the announced stimulus is aimed at papering over the cracks and meeting short-term GDP targets rather than the fundamental change in direction needed to address the underlying consumption deficit.
We expect short-term relief to be followed by a resumption of the deflationary contraction.
Acknowledgments
- Reuters: China’s September factory activity cools notably, Caixin PMI shows
- Trading Economics: Caixin China Manufacturing PMI
- George Magnus: China’s leaders are spooked
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.
The Great Pumpkin | Eric Cinnamond
Great stock market analogy from Eric Cinnamond at Palm Valley Capital:
As a kid I always looked forward to Halloween. Growing up in a health-conscious “no sweets” household, Halloween was an opportunistic time to load up on my favorite chocolate bars and candy. If I played my bag of treats right, my sweet tooth could be satisfied until Christmas!
Another thing I enjoyed about Halloween was the television special, It’s the Great Pumpkin, Charlie Brown. It was and remains a classic. Released in 1966, the Peanuts special follows its cast members as they celebrate Halloween. Some of the Peanuts crew go trick-or-treating, while others attend a party. But not Linus—he does his own thing.
Instead of celebrating with his friends, Linus spends his Halloween waiting in a pumpkin patch for the Great Pumpkin. According to Linus, “On Halloween night, the Great Pumpkin rises from his pumpkin patch and flies through the air with his bag of toys to all the children.” Unfortunately, the Great Pumpkin never arrives, and Linus is ridiculed by his friends. He’s even called a blockhead!
Our belief in full market cycles, including a bull and bear market, is beginning to feel more and more like Linus’s belief in the Great Pumpkin. However, instead of pumpkins, we sit in a patch of T-bills waiting for the return of sensible equity valuations. And rather than bringing a bag of toys, we expect this cycle’s Great Pumpkin (bear market) will bring patient investors the gift of lower prices and opportunity.
From the outside looking in, believing in full market cycles, bear markets, and even recessions, probably looks foolish. To some, we might even look like blockheads! Nevertheless, we continue to believe equity valuations are very expensive, exposing investors to considerable risk. In fact, we consider this stage of the market cycle to be an asset bubble—the third stock market bubble of our careers. The first two bubbles were verified by significant losses, with the S&P 500 losing half of its value during both bear markets (2000-2002 -49% and 2007-2009 -56%).
Our latest page on stock market valuation supports his view:
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.
Bull/Bear Market Indicator
We aim to consolidate our economic and financial market analysis into a single quantifiable bull/bear market indicator.
We modified one of our five component market risk indicators to reduce whipsaws. Instead of the Fed Funds Rate confirmed by ISM Services Business Activity, we have created a composite indicator comprising:
- the Fed Funds Rate;
- the Coincident Economic Activity Index from the Philadelphia Fed;
- the Chicago Fed National Financial Conditions Index; and
- the S&P 500 with 30-week Twiggs Smoothed Momentum.
Three out of four components are required to confirm a bear market.
Our first signal was the Coincident Economic Activity Index which crossed below 2.5% annual growth for the 12 months to July, warning that the economy is slowing.
Last week, the Fed announced a 50 basis point rate cut, adding a second bear signal.
However, the Chicago Fed National Financial Conditions Index below zero signals easy monetary conditions at a low -0.56.
30-Week Twiggs Smoothed Momentum also signals a healthy up-trend on the S&P 500 at 12.8%.
The signal, therefore, remains Risk-On.
Of our four remaining risk indicators, only one signals Risk-Off.
The spread between the 10-year Treasury yield and the 3-month T-bill discount rate has been negative for 22 months. While that is a record time, it does not negate its reliability in predicting a recession within 12 months after the inversion ends.
Our second risk signal would only be triggered when the yield curve inversion ends.
Employment in cyclical industries—manufacturing, construction, transport, and warehousing—accounts for most of the jobs lost during a typical recession. Cyclical employment grew by 17,900 in August, with no sign of a recession on the horizon.
Heavy truck sales are another reliable leading indicator of recessions. Seasonally adjusted sales of more than 42,000 units in August continue to signal a robust economy.
Conclusion
Four out of five risk indicators continue to signal a bull market.
Our strategy is to divide our investment portfolio into five equal-sized buckets of 20% each. For each indicator warning of a bear market, one bucket will be switched to alternative investments—such as A-grade bonds or gold.
At present, only the 10-year/3-month Treasury yield curve warns of a bear market, so we maintain 80% exposure to stocks.
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.
ASX retraces
A tall shadow on the ASX 200 indicates short-term selling pressure and a likely retracement to test its new support level at 8100.
Financials continue their advance, but gradually, with lower Trend Index peaks warning that buying pressure is fading.
The ASX 300 Metals & Mining Index hesitated after its recent rally and will likely re-test short-term support at 5200. Penetration of the descending trendline indicates that the downtrend has weakened, and a correction that respects support at 5000 would confirm that a bottom has formed.
Iron ore continues its downtrend as Chinese industrial demand weakens. A breach of support at $90 per tonne would confirm our target of $80.
However, the All Ordinaries Gold Index broke resistance at 8500, signaling another advance with an expected target of 9000.
Conclusion
The ASX 200 is retracing to test support at 8100. Respect will likely confirm another advance with a target of 8500. Financials and gold miners are strong, but iron ore remains in a downtrend with a long-term target of $80 per tonne.
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.