Category: Australia & NZ

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What a difference a week makes

Summary:

  • S&P 500 advances toward 2000.
  • China respects primary support.
  • ASX 200 rallies.

Market sentiment shifted significantly to the bull side after some solid employment numbers. There are still concerns about low interest rates across the US and other major economies, but these policies are likely to continue — with corporate earnings remaining buoyant — for the foreseeable future. And as Eddy Elfenbein observed: “…market corrections solely due to valuation are fairly rare. If the market’s dropping, earnings usually are too.”

The S&P 500 is advancing towards the psychological barrier of 2000. Weekly (13-week) Twiggs Money Flow recovered above its descending trendline and Daily (21-day) is trending higher, signaling medium-term buying pressure. Expect retracement at the 2000 level, but short duration or narrow consolidation would indicate continued buying pressure and another advance. Reversal below 1950 is unlikely, but would warn of a correction to the rising trendline.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

Buoyed by Fed monetary policy, the CBOE Volatility Index (VIX) is at extremely low levels, indicative of a bull market.

S&P 500 VIX

The Shanghai Composite Index respected primary support at 1990/2000 and rising Twiggs Money Flow indicates medium-term buying pressure. Follow-through above 2080 would indicate another test of 2150. Further ranging between 2000 and 2150 is expected — in line with a managed “soft landing”. Breach of primary support is unlikely at present, but would signal a decline to 1850*.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 is headed for another test of resistance at 5550 while an up-turn on 13-week Twiggs Money Flow suggests medium-term buying pressure. Twiggs Money Flow has been descending for some time, indicating long-term selling pressure, but failure to breach the zero line suggests buying support and completion of another trough above zero — with a rise above 20% — would confirm the resumption of long-term buying pressure. Breakout above 5550 would offer a long-term target of 5850*. Reversal below support at 5350 is unlikely, but would warn of a down-trend.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

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Aussie retraces as ASX 200 strengthens

RBA concern over the rising Australian Dollar is increasing, but whether this will motivate governor Glenn Stevens to do more than attempt to talk the market lower remains to be seen. The Aussie retraced to test its new support level, but only a fall below $0.92 would suggest a trend change. Recovery above $0.94 would suggest not, while follow-through above $0.95 would confirm a target of $0.97.

AUDUSD

The ASX 200 broke clear of its descending trendline, suggesting that the correction is over. But 21-day Twiggs Money Flow remains weak and follow-through above 5540/5560 unlikely. Further ranging between 5400 and 5550 seems likely. Reversal below 5380 is now unlikely, but would warn of a test of 5300.

ASX 200

* Target calculation: 5550 + ( 5550 – 5400 ) = 5700

ASX 200 VIX again tracked lower, indicating a bull market.

ASX 200

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ASX 200 selling pressure

The ASX 200 is once again testing support at 5380/5400. Declining 21-day Twiggs Money Flow below zero indicates medium-term selling pressure. Correction to 5300 is likely. The primary trend remains upward and this should prove a good entry point for long-term investors. Recovery above 5470 is unlikely at present, but would signal another primary advance.

ASX 200

* Target calculation: 5550 + ( 5550 – 5400 ) = 5700

ASX 200 VIX remains low, indicative of a bull market.

ASX 200

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S&P 500 unfazed

Summary:

  • S&P 500 continues a primary advance.
  • China respects primary support.
  • ASX 200 continues to signal weakness.
  • Momentum investors need to hold positions.

The S&P 500 retraced to test its latest support level at 1950 after a downward GDP revision for the first quarter. Respect indicates medium-term buying pressure — also evidenced by rising 21-day Twiggs Money Flow. Follow-through above 1970 would confirm a test of 2000*. Reversal below 1950 is unlikely, but penetration of the secondary trendline would warn of a correction.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

The CBOE Volatility Index (VIX) remains low, indicative of a bull market.

S&P 500 VIX

The Shanghai Composite Index respected primary support at 1990/2000. 21-Day Twiggs Money Flow oscillating above zero indicates buying support, but this may be due to the managed “soft landing”. What we do know is that a fall below zero would definitely signal selling pressure. Breach of support would signal a decline to 1850*. The primary trend is expected to continue its downward path, but further ranging between 2000 and 2150 is likely. An abrupt fall is a fairly remote possibility.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 made a false break above 5470, but 21-day Twiggs Money Flow below zero warns of medium-term selling pressure. Breach of support remains likely and would indicate a correction to 5300. The long-term trend, however, remains upward. Support at 5300/5400 would offer a great entry point for long-term investors. Recovery above 5470 is unlikely at present, but would signal a test of resistance at 5550.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

I repeat my warning from last week: Momentum investors should not attempt to time secondary corrections and need to endure the present volatility in order to reach their intended investment goals.

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Bank of England throws egg all over RBA, APRA | | MacroBusiness

Of all of the financial systems in the world, Australia’s is most similar to the UK. Of all of the restrictive housing planning systems in the world, Australia’s is most similar to the UK. Of all of the house price boom and bust cycles in the world, Australia’s is most similar to the UK. The Bank of England also practices inflation targeting though its cap is 2%. The UK and Australia share a similar economic model reliant upon external borrowing to fund consumption and low export-to-GDP ratios but the main difference is that the UK economy is a more diverse mix of value-adding sectors with a much higher contribution from manufacturing.

But today there is one very new difference. The UK has announced it will henceforth practice macroprudential regulation to control its housing cycles and prevent them from hollowing out the economy…..

Read more at Bank of England throws egg all over RBA, APRA | | MacroBusiness.

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ASX 200 still plagued by indecision

The ASX 200 found support at 5380/5400. Recovery above 5470 would break the descending trendline, suggesting that the correction is over — and a test of resistance at 5540/5560 likely. But 21-day Twiggs Money Flow whipsawing around zero indicates indecision. Respect of (or a false break above) 5470 would suggest correction to 5300.

ASX 200

* Target calculation: 5550 + ( 5550 – 5400 ) = 5700

ASX 200 VIX making new lows, however, indicates a bull market.

ASX 200

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Aussie Dollar threatens breakout, Euro tests support

The Aussie Dollar continues to test resistance at $0.94. Recovery of 13-week Twiggs Momentum above zero suggests continuation of the up-trend, testing resistance at $0.97. Reversal below $0.92 is unlikely at present, but would warn of a decline to the band of support between $0.87 and $0.89.

Aussie Dollar

The Euro respected primary support at $1.35 and the rising long-term trendline. Recovery above $1.37 would suggest a rally to $1.39/$1.40, but descending 13-week Twiggs Momentum crossed below zero, warning of weakness. Breach of $1.35 would signal a decline to $1.31*.

Euro/USD

* Target calculation: 1.35 – ( 1.39 – 1.35 ) = 1.31

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ASX 200 rallies

The ASX 200 rallied on Monday, but 21-day Twiggs Money Flow at zero indicates (medium-term) buying pressure is weak. Follow-through above 5470 would signal a test of resistance at 5540/5560, but China continues to weigh on the index and reversal below 5380 would warn of a test of 5300.

ASX 200

* Target calculation: 5550 + ( 5550 – 5400 ) = 5700

ASX 200 VIX making new lows is indicative of a bull market.

ASX 200

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“Highly unlikely to ever see a Storm again”

Andrew Starke welcomes the latest proposed changes to Future of Financial Advice (FoFA) legislation in FINSIA News:

Changes… outlined by the government on Friday have generally been well received, with many in the industry now hoping for final clarity on a process that has been running since the Labor Government revealed the proposed reform package in April 2011…..First and foremost, the changes outlined by the government on Friday ensure a clear ban on commissions after it had previously left the door open via the so-called ‘Wolf of Wall Street’ clause within general advice. Any possibility of a return to commissions on investments or superannuation products has now been ended.“This response removes all doubt that commissions will be introduced in the provision of general advice. The government will define and ban commissions in black letter law” said John Brogden, CEO of the Financial Services Council FSC. “The changes outlined by the government also maintain a detailed and comprehensive best interest duty requiring a financial adviser to act in the best interests of their client.”

Best interest clarified
While the perceived watering down of the best interest duty has attracted a great deal of attention in the mainstream press, Brogden said this should be put in perspective. Prior to FoFA, financial advisers simply had to offer ‘appropriate advice’ while they now need to comply with a raft of regulation. “There are six separate duties in the Corporations Act that require a financial adviser to act in the best interests of their client. In addition, there are six specific steps that must be met by an adviser when providing advice that codifies the best interest duty,” Brogden said. “The government has made one minor change to the best interest duty by removing an unnecessary ‘catch all’ provision. This change will actually clarify the best interest duty and remove any ambiguity for a financial adviser to always act in a client’s best interests.” The FSC has legal advice from leading commercial counsels Ian Jackman SC and Gregory Drew which it said confirms that the removal of ambiguous ‘catch-all’ phrase will not dilute the obligation of an adviser to act in the best interest of their client……The Australian Bankers’ Association ABA also welcomed the announcement and said the amendments would preserve the original intent of the law while correcting the current overreach and broader uncertainties.

What puzzles me is:

  • How an overriding provision — that advisers act in the best interests of their clients — can be “ambiguous”?
  • How removal of the overriding provision helps to clarify the situation? and
  • Why, if legal advice confirms that removal of the ‘catch-all’ phrase “will not dilute the obligation of an adviser to act in the best interest of their client”, should it be removed?

Major banks have spent billions of dollars buying up financial planning firms in order to secure distribution of their investment products. Christopher Joye at AFR puts it in a nutshell:

The big vertically integrated institutions (mainly the four majors and AMP), which now control 70 per cent of planners, want these tied distributors to have the freedom to recommend in-house platforms, super funds and investments without being hampered by a catch-all best interests duty.

An overriding provision would certainly not be in the banks’ best interests.

Read more at "Highly unlikely to ever see a Storm again".

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A good week for the S&P 500 but not the ASX

Summary:

  • Good week for US markets.
  • China continues to threaten further down-side.
  • The ASX 200, pulled in opposite directions, is range bound for the present.
  • Momentum strategies require persistence.

The S&P 500 broke through 1950 and is expected to test the next resistance level at 2000*. Rising 21-day Twiggs Money Flow signals medium-term buying pressure. Reversal below 1925 is unlikely at present but would warn of a correction.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

The CBOE Volatility Index (VIX) continues its downward path, indicating low risk typical of a bull market.

S&P 500 VIX

The Shanghai Composite Index rebounded Friday after a tough week and continues to test primary support at 1990/2000. Breach of support would signal a decline to 1850*. 21-Day Twiggs Money Flow oscillating above zero indicates buying support; a fall below zero would suggest selling pressure. The primary trend is expected to continue its downward path, but this is a managed descent and an abrupt fall seems unlikely.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

After a strong surge on Thursday the ASX 200 retreated below 5450 on Friday, suggesting another test of support at 5400. Reversal of 21-day Twiggs Money Flow below zero indicates medium-term selling pressure. Breach of support is likely and would indicate a correction to 5300. Recovery above 5500 is unlikely at present, but the long-term trend remains upward.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

Resist the urge to avoid discomfort

Momentum stocks have suffered a fair degree of turbulence since April, after a strong first quarter. Investors unfortunately have to endure periods like this, when the market appears hesitant or lacks direction, in much the same the same way as travelers can expect turbulence during an air flight. It is important is to resist the urge to avoid discomfort by exiting positions. Enduring uncomfortable parts of the journey are necessary if you want to reach your intended destination. Our research on both the ASX and S&P 500 has shown that attempting to time secondary movements in the markets does not enhance but erodes performance: the average (re-)entry price is higher than the average exit price after accounting for brokerage.

A basic rule of thumb in investing is that investors need to endure higher volatility in order to achieve higher returns. If your investment time frame is long-term, it is important to focus on the end result and not be overly concerned by weekly fluctuations.

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