Author: Colin Twiggs

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.
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ASX 200 hesitant

The resources sector is strengthening.

The ASX 300 Metals & Mining index broke resistance at 4450, suggesting another advance. Buoyed by rising iron ore prices, the breakout offers a target of 4800.

ASX 300 Metals & Mining

Talk of an imminent trade deal lifted iron ore above previous support at 90. Expect another test of primary support at 80, but respect would confirm that a base has formed above 80.

Iron Ore

Financials, on the other hand, are still weak.

The ASX 300 Banks index continues in a down-trend. Expect retracement to test resistance at 7600 but reversal seems unlikely at this stage. Respect of resistance would confirm a target of 6800.

ASX 300 Banks

The ASX 200 REITs index broke support at 1600 after a false break through 1650. Typical of a bull trap, expect a decline to test support at 1500.

ASX 200 REITs

A bearish outlook for banks is keeping the ASX 200 hesitant. The daily chart shows narrow consolidation below resistance at 6750; a bullish sign. Breakout is likely but the Trend Index below zero warns that buyers are cautious.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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S&P 500 recovers but employment gains sluggish

Short retracement on the S&P 500 that respected support at 3000 strengthens the bull signal. Further gains are expected in the short- to medium-term.

S&P 500

Corporate profits before tax continue to decline after adjusting for inflation, exposing the vulnerability of high earnings multiples.

S&P 500

Hours worked (non-farm payroll x average weekly hours) for November also point to low annual GDP growth of around 1.5% after inflation.

Real GDP and Hours Worked

Employment growth for the 12 months to November came in at a similar 1.48%.

Employment Growth & Fed Funds Rate

Not enough to justify a P/E multiple of 23.25.

Average hourly earnings growth is increasing, especially for production & non-supervisory employees (3.65% for 12 months to November), but in the present environment the Fed seems unconcerned about inflationary pressures.

Average Hourly Earnings

Patience

Patience is required. We have had a weak S&P 500 retracement confirm the breakout but there is minimal up-turn in November employment indicators to support the bull signal. Market risk is elevated and investors should exercise caution.

“The world has a way of undermining complex plans. This is particularly true in fast moving environments. A fast moving environment can evolve more quickly than a complex plan can be adapted to it….”
~ Carl Von Clausewitz, Vom Kriege (On War) (1780-1831)

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Silver bearish for Gold

Silver broke support at $16.80/ounce, warning of another decline. Declining Trend Index peaks indicate selling pressure.

Silver (USD/ounce)

Gold has yet to break support at $1450 but is likely to follow Silver if Treasury yields rise.

Gold (USD/ounce)

Higher Treasury yields weaken demand for Gold; it increases the opportunity cost of holding precious metals with no yield. Rising Trend Index troughs warn of upward pressure on yields. Expect another test of resistance at 2.0%.

10-Year Treasury Yields

A weakening Yuan (in USD) signals higher USD reserves held by the PBOC — and increased Treasury holdings (driving yields lower). Expect another test of primary support at 14 US cents.

Chinese Yuan CNY/USD

China opted for a largely symbolic response to President Trump’s signing of the Hong Kong Human Rights and Democracy Act. Increased sanctions against foreign NGOs are lame, according to Trivium China:

Foreign NGOs, especially those dedicated to democracy and human rights, have virtually no latitude to operate in China as it is. Additional “sanctions” are basically meaningless.

The weak response elicited a further push from Trump:

“In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right,” Trump told reporters in London. [CNBC]

The US is set to impose further tariffs if the December 15 deadline is not met. Commerce Secretary Wilbur Ross suggested that waiting until after the 2020 election to reach a trade deal with China would take away some of Beijing’s leverage, adding that “no high-level discussions are scheduled before the Dec. 15 deadline.”

We can’t see the US caving in to Beijing’s demands to roll back existing tariffs, nor the CCP kow-towing to Trump. Expect further delays.

Australia

Australia’s All Ordinaries Gold Index is testing support at 6500. Breach would signal continuation of the downward trend channel. Breakout from the trend channel is unlikely but would warn that a bottom is forming.

All Ordinaries Gold Index

Patience

Gold remains in a long-term up-trend. The current correction may offer an attractive entry point but we need confirmation that the up-trend is intact.

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Banks drag on ASX 200

Banks are plagued by fears of large AUSTRAC penalties for breaches of anti money-laundering and counter-terrorism regulations. Commonwealth have paid a $700 million fine, Westpac have already been charged, NAB alerted investors of potential liabilities in their annual report, while ANZ says there are no signs of transgressions.

In other problem areas, mortgage stress continues to rise, with Martin North (Digital Finance Analytics) estimating that 32.5% of households are now in mortgage stress “based on an assessment of their cash flow.” Worst hit are fringe suburbs, where the rate is as high as 60%.

Elsewhere, RBNZ eased their calls for major banks to increase Common Equity Tier 1 Capital (CET1) to 13.5%, with a further 2.5% comprising other forms of capital such as hybrids and convertible preference shares, and relaxed the phase-in from 5 to 7 years. But the changes will still $13.8 billion in additional capital, according to the big four banks. APRA, by comparison, requires a CET1 ratio of 10.5%.

The ASX 300 Banks index continues to trend lower, with declining peaks on the Trend Index warning of selling pressure. Expect retracement to test resistance at 7600; respect would confirm the  target of 6800.

ASX 300 Banks

The ASX 200 REITs index is again testing support at 1600 after a false break above 1650. Breach of support remains unlikely, with financial markets searching for yield, but would offer a target of 1500.

ASX 200 REITs

Iron ore has made a bear market rally to test resistance at 90. Respect of resistance is likely and would warn of another decline.

Iron Ore

A Trend Index peak near zero on the ASX 300 Metals & Mining index warns of another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400, while respect of support would indicate that a base is forming.

ASX 300 Metals & Mining

Declining banks are dragging the ASX 200 lower and another test of support at 6400 is likely. A resources sector reversal would increase the chance of top forming on the broad index

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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S&P 500: Betting on QE

The S&P 500 continued its cautious advance in a shortened week due to Thanksgiving. Expect retracement to test the new support level at 3000.

S&P 500

I believe that the latest surge has little do with an improved earnings outlook and is simply a straight bet that Fed balance sheet expansion (QE) will goose stock prices in the short- to medium-term. The chart below highlights the timing of the increase in Fed assets and its effect on the S&P 500 index.

S&P 500 and Fed Total Assets

There is plenty of research on the web pointing to a strong correlation between QE and equity prices. Here are two of the better ones:

Economic Activity

If we look at fundamentals, many of them are headed in the opposite direction.

Bellwether transport stock Fedex (FDX) is testing primary support at 150. Breach would warn of a slow-down in economic activity.

Fedex

Monthly container traffic at the Port of Los Angeles shows a marked year-on-year fall in imports and, to a lesser extent, exports.

Port of Los Angeles: Container Imports & Exports

Rather than boosting local manufacturers, industrial production is falling.

Industrial Production

Production of durable consumer goods is falling even faster, though the October figure may be distorted by the GM strike.

Industrial Production: Durable Consumer Goods

What is clear is that slowing growth in the global economy is unlikely to reverse any time soon.

Market Cap v. Corporate Profits

Yet market capitalization for non-financial stocks is at a precarious 24.7 times profits before tax, second only to the Dotcom bubble. The surge since 2010 coincides with Fed injection of a net $2.0 trillion into financial markets ($4.5T – $2.5T in excess reserves).

Nonfinancial corporations: Market Capitalisation/Profits before tax

The problem, as the Fed unwind showed, is that once central banks embark on this path, it is difficult for them to stop. The Bank of Japan started in the late 1980s — and is still at it.

Bank of Japan: Total Assets

Margin Debt

This chart from Advisor Perspectives compares the S&P 500 to margin debt. The decline since late 2018 appears ominous but November margin debt levels may reflect an up-turn. We will have to keep a weather eye on this.

FINRA Margin Debt & S&P 500 Index

Patience

Patience is required. First, wait for S&P 500 retracement to confirm the breakout. Second, look for an up-turn in November economic indicators, especially employment, to support the bull signal. Failure of economic indicators to confirm the breakout will flag that market risk is elevated and investors should exercise caution.

“If the mind is to emerge unscathed from this relentless struggle with the unforeseen, two qualities are indispensable: first, an intellect that, even in the darkest hour, retains some glimmerings of the inner light which leads to truth; and second, the courage to follow this faint light wherever it may lead.”
~ Carl Von Clausewitz, Vom Kriege (On War) (1780-1831)

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Gold: Kill the chicken to scare the monkey

10-Year Treasury yields retreated from resistance at 2.0%, helped by increased Chinese purchases.

10-Year Treasury Yields

Evidenced by the Yuan falling against the US Dollar. Breach of recent support 14.15 would warn of another test of primary support at 14 cents.

Chinese Yuan CNY/USD

Further Yuan weakness and lower Treasury yields are likely after President Trump signed the Hong Kong Human Rights & Democracy Act into law. This puts China in a difficult position. China’s foreign ministry:

“We urge the United States not to continue going down the wrong path, or China will take countermeasures and the U.S. must bear all the consequences.”

Their economy is hemorrhaging and they badly want an interim trade deal but failure to respond to the latest US action would reveal a weak hand. Expect an indirect response as in the popular idiom – kill the chicken to scare the monkey – making an example of someone in the hope that it will deter others.

Gold continues to test support at $1450 but lower Treasury yields (from a weaker Yuan) would strengthen demand as it lowers the opportunity cost of holding Gold. Breach of support is unlikely unless Treasury yields again test resistance at 2.0%.

Gold (USD/ounce)

Silver is similarly testing support at $16.80/ounce but we are unlikely to see a follow-through unless Treasury yields strengthen.

Silver (USD/ounce)

Australia’s All Ordinaries Gold Index continues in a downward trend channel. An up-tick in the Trend index and short-term support at 6500 suggest a rally to test the upper trend channel, around 7000. Breakout from the trend channel, while still unlikely, would warn that a bottom is forming. Breach of support at 6500 is more likely and would offer a short-term target of 6000.

All Ordinaries Gold Index

Patience

Gold remains in a long-term up-trend. The current correction may offer an attractive entry point but we first need to confirm that the up-trend is intact.

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ASX 200: Don’t argue with the tape

“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.

ASX 200

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.

Iron Ore

Business investment has slowed, causing wages to stagnate.

Australia: Business Investment

Retail sales weakened as a consequence, contracting for the first time since the early 1990s.

Australia: Retail Sales

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.

ASX 300 Banks

The ASX 200 REITs index broke out of its descending triangle, signaling another advance. Financial markets are searching for yield.

ASX 200 REITs

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.

ASX 300 Metals & Mining

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.

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S&P 500: A cautious advance

A monthly chart shows the S&P 500 cautiously advancing after breaking resistance at 3000. Short candle bodies reflect hesitancy but Trend Index troughs above zero remain bullish.

S&P 500

ETF flows reveal risk-averse investors, with outflows from US Equities in the last week and a relatively much larger outflow from Leveraged ETFs. Inflows are mainly into Fixed Income and Inverse.

ETF Flows

Year-to-date flows tell a similar story, with outflows from Equities and into Fixed Income. So where is the money flow into equities coming from?

Twitter: Buybacks

Meanwhile, the Fed has eased up on their balance sheet expansion now that the PBOC is back in the market. But broad money (MZM plus time deposits) continues to spike upwards, warning that the Fed is trying to head off a potential liquidity squeeze. They are not always successful. A similar spike occurred before the last two recessions.

Fed Assets and Broad Money Growth

The personal savings rate is climbing. Far from a positive sign, this warns that personal consumption, the largest contributor to GDP, is likely to fall.

Saving Rate

This is a dangerous market and we urge investors to be cautious.

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Gold, Treasuries and China’s Yuan

China’s Yuan retreated against the Dollar, encountering resistance at 14.35 US cents as the seemingly endless trade talks hit another rough patch. Breach of recent support 14.15 would warn of another test of primary support at 14 cents.

Chinese Yuan CNY/USD

Chinese purchases have weakened 10-Year Treasury yields in the last two weeks. A Yuan at 14 cents is likely to result in 10-year yields testing support at 1.50%. The disconnect between long-term and short-term rates in the US is growing, with long-term rates increasingly dictated by actions at the PBOC.

10-Year Treasury Yields

Declining yields strengthen demand for Gold as it lowers the opportunity cost. Expect continued support at $1450/ounce and a possible test of the descending trendline at $1500. Breach of support is unlikely unless Treasury yields again test resistance at 2.0%.

Gold (USD/ounce)

Silver is similarly testing support at $17.00/ounce but we are unlikely to see a follow-through unless Treasury yields strengthen.

Silver (USD/ounce)

Australia’s All Ordinaries Gold Index continues in a downward trend channel, headed for secondary support at 6000. Declining Trend Index peaks warn of strong selling pressure. Respect of 6000 would signal that the primary up-trend is intact, while breach and a test of primary support at 5400 would warn of trend weakness.

All Ordinaries Gold Index

Patience

Gold remains in a long-term up-trend. A correction may offer an attractive entry point but we first need to confirm that the up-trend is intact before increasing exposure to gold stocks.

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ASX 200: Banks break support

ASX 300 Banks index broke support at 7600, signaling a correction to test primary support at 6750. Declining peaks on the Trend Index confirm selling pressure.

ASX 300 Banks

The ASX 200 REITs index has formed a bearish descending triangle. Breach of support at 1600 would warn of a correction. It seems unlikely that would reach primary support at 1350 because financial markets are searching for yield.

ASX 200 REITs

The ASX 300 Metals & Mining index is also faltering. 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.

ASX 300 Metals & Mining

Iron ore found short-term support at 80 but continues its primary down-trend. Our long-term target is 65.

Iron Ore

The ASX 200 retreated from resistance at 6800. Declining Trend Index peaks only indicate secondary selling pressure at present. Expect another test of support at 6400. Breach is still unlikely but would offer a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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