Category: Countries & Regions

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ASX 200 miners tumble

ASX 300 Metals & Mining Index broke support at 3500, signaling a primary decline with a target of 3100. A bearish sign for the broad ASX 200 index.

ASX 300 Metals & Mining

The ASX 300 Banks Index is consolidating above primary support at 7000. Recovery above 7450 would indicate another bear rally but the primary trend is down and breach of 7000 would signal a decline with a long-term target of 5000.

ASX 300 Banks Index

The ASX 200 continues to display long tails and a bullish divergence on Twiggs Money Flow, signaling buying interest. Recovery above 5950 would suggest another advance but that is unlikely in the current climate. The primary trend is down and breach of primary support at 5650 would signal a decline with a target of 5000.

ASX 200

 

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

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S&P 500 earnings rise while stocks fall

96% of S&P 500 component stocks have reported earnings for Q3 2018. Including estimates for stocks that have not yet reported points to a 29% increase over earnings for Q3 in the previous year. What is more interesting is that S&P are projecting a further 2% increase for the next quarter (Q4) and 12% by Q3 2019.

S&P 500 Quarterly Earnings

Now these forecasts could be wrong but what they show is that the market expects further increases in earnings in the year ahead. Compare that to the sharp fall in earnings in Q4 2000 and in Q3 2007, before the last two major market down-turns.

Earnings growth may be slowing — it is hard to top a 29% increase —  but why the sharp downgrade?

The perceived level of risk is rising. Primarily because of the threat of a trade war with China, but also problems in the EU with Brexit and Italy. Earnings multiples are being adjusted downwards to compensate for higher risk.

S&P 500 PE of Previous Maximum Earnings

Even after the recent sell-off (orange on the above chart) the earnings multiple for S&P 500 stocks remains elevated. I use maximum 12 month earnings to-date, rather than current earnings, to remove distortions caused by temporary setbacks. The current P/E is still above the peaks prior to the October 1987 and October 1929 crashes.

The difference is that here, earnings are rising. While we cannot rule out further falls, they are unlikely to be as severe as 1987 and our expected worst case scenario is a P/E of 15. While that is harsh, it is a worst case and not the most likely outcome.

If you are a long-term investor, the sell-off should present opportunities to accumulate quality growth stocks. But patience is required. Rather get in too late than too early.

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ASX 200 bullish divergence

The ASX 300 Banks Index respected primary support at 7000 but only recovery above 7450 would indicate another bear rally. Declining peaks on the Trend Index continue to warn of selling pressure. Breach of 7000 would signal a primary decline with a long-term target of 5000.

ASX 300 Banks Index

ASX 300 Metals & Mining Index is again testing support at 3500. Breach would be a bearish sign for the broad ASX 200 index. Primary down-trends on the two biggest sectors would be likely to drag the overall index into a similar down-trend.

ASX 300 Metals & Mining

On the ASX 200, a long tail and bullish divergence on Twiggs Money Flow indicate strong support. Recovery above 5950 would suggest another advance but that is unlikely in the current climate. Breach of primary support at 5650 would signal a primary down-trend with a target of 5000.

ASX 200

 

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

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Coles Group Limited (COL)

Coles commenced trading on the ASX on 21 November 2018, after the spin-off from Wesfarmers was approved by the Supreme Court of WA.

Trading is initially on a deferred settlement basis, with the demerger expected to be implemented on 28 November 2018.

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V- or M-shaped correction?

Last week I mentioned that there are few “V-shaped” corrections and plenty with a “W-shape”. There are also a few with an “M-shape”, leading to a major market sell-off. Here are some examples on Dow Jones Industrial Average.

2001 is the only good example I can find of a V-shaped correction.

Dow Jones Industrial Average

It rolled over later in 2002 into a more conventional W-shape bottom with several tests of support at 7500.

Dow Jones Industrial Average

This was followed by the banking crisis of 2008 which started with an M-shape in 2007. Successive false breaks above resistance (orange arrows) were followed by breach of support (red arrows)…before Lehman Bros filing for bankruptcy on September 15 led to a major capitulation.

Dow Jones Industrial Average

2011 is nowadays considered a secondary movement but at the time caused widespread alarm. Starting with an M-shaped top, it broke support in August before forming a W-shaped bottom with several tests of support at 11000.

Dow Jones Industrial Average

2015 was a more conventional W-shape precipitated by falling oil prices.

Dow Jones Industrial Average

Now, in 2018, we have the makings of either a W-shaped correction or an M-shaped reversal. The false break above resistance at 26500 is definitely bearish but was followed by a bullish higher low at 24000.

Dow Jones Industrial Average

There are three possible options:

  1. Completion of a W-shape correction, with breakout above 27000;
  2. An M-shaped reversal, with a fall below 23500; or
  3. A lengthy consolidation reflecting uncertainty, as in 1999 to 2001.

Dow Jones Industrial Average

At this stage, option 1 is most likely. Buybacks and strong Q3 earnings are likely to counter bearish sentiment.

That would change if we see:

A negative yield curve, where the 3-month T-bill rate crosses above 10-year Treasury yields;

Yield Differential

Rising troughs above 1% on the S&P 500 21-day Volatility Index; or

S&P 500

Bellwether transport stock Fedex follows-through below support at 210.

Fedex

Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity.

~ Socrates

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Two years is a long time

An outcome where neither Republicans nor Democrats control both chambers provides markets with reassurance that nothing too radical will emerge, making the outlook for the next two years appear more predictable and the settings more stable……But the complacency might be premature. ~ Stephen Bartholomeusz

With Democrats in control, Donald Trump is unlikely to get further tax cuts through Congress. Even a large infrastructure spending program, which both major parties support, is unlikely to enjoy a smooth passage through the House because of a polarizing President and a federal budget deficit already close to 5.0% of GDP.

The Fed will continue to raise interest rates in order to contain inflationary pressures, fueled by low unemployment and the current budget deficit. Rising average hourly wage rates warn that the Fed will be forced to act.

Average Hourly Wage Rate

Earnings growth rates are likely to slow because of higher interest rates, higher wages and higher input costs from imports and trade tariffs (although a strong Dollar may soften the blow). But there is no sign of this in Q2 2018, with profits rising and employee compensation falling as a percentage of value added.

Corporate Profits and Employee Compensation as a Percentage of Value Added

Restraint from buybacks in October — the four weeks prior to earnings releases are known as the “blackout period” — may have contributed to the severity of the recent correction. But now most earnings have been reported and buybacks are likely to return with a vengeance, taking advantage of low prices. I expect support at October lows to hold, though there is likely to be another test in the next few weeks.

Declining Twiggs Money Flow peaks on the S&P 500 warn of selling pressure and it is likely to take several months for confidence to be restored. Recovery above 2850 would be bullish, suggesting another advance.

S&P 500

The Nasdaq 100 respected its long-term rising trendline at 6600. Again, recoveries take time: there are few “V-shaped” corrections and plenty with a “W-shape”.

Nasdaq 100

Buybacks and strong reported Q3 earnings are likely to counter bearish sentiment but there is one wild-card. Trade is one of the few areas where the President still has the reins and he is likely to make full use of them. I suspect that the Chinese will attempt to wait him out, making conciliatory noises but doing little that is concrete, which is likely to frustrate Trump further. He may try to force a deal through before the next election in two years. That could only end badly.

The two most powerful warriors are patience and time.

~ Leo Tolstoy

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Banks threaten ASX 200 fall

The ASX 300 Banks Index is testing primary support at 7000. Declining peaks on the Trend Index warn of selling pressure.

ASX 300 Banks Index

Breach of 7000 would signal another primary decline with a long-term target of 5000.

ASX 300 Banks Index

ASX 300 Metals & Mining Index continues to consolidate between 3500 and 4000. Breach of 3500 would be a bearish sign for the broad market ASX 200 index. Primary down-trends on its two biggest sectors would be likely to drag the overall index down.

ASX 300 Metals & Mining

On the ASX 200, Twiggs Money Flow is holding above zero, suggesting light volume on the declines. Breach of primary support at 5650, however, would confirm a primary down-trend.

ASX 200

Offering a target of 5000.

ASX 200

I have been cautious on Australian stocks, especially banks, for a while, and hold over 30% cash in the Australian Growth portfolio.

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Bank & miners rally should lift ASX

The ASX 200 displays a cautious rally, with short candles reflecting an absence of buyer enthusiasm. But bullish divergence on 21-day Twiggs Money Flow indicates longer-term confidence.

ASX 200 with Volume

The monthly chart shows similar rising troughs on 13-week Twiggs Money Flow, reflecting buyer confidence. Recovery above 6000 would be bullish, suggesting another advance. Respect of resistance is less likely, but would warn of another test of primary support at 5650.

ASX 200

The ASX 300 Banks Index respected primary support at 7000, while bullish divergence on 13-week Trend Index indicates buying pressure. Expect a bear rally to test resistance at 8000. The primary trend, however, is down.

ASX 300 Banks Index

The ASX 300 Metals & Mining Index is consolidating above 3400 but rising iron ore prices are likely to lift the index. Recovery above 3800 would signal another advance.

ASX 300 Metals & Mining Index

The All Ordinaries Gold Index again respected resistance at 5500 and another test of primary support at 4500 is likely. Breach would warn of a primary down-trend with a target of 3500.

All Ordinaries Gold Index

I remain cautious on Australian banks and hold over 30% cash in the Australian Growth portfolio.

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Nasdaq and S&P 500 rally

The Nasdaq 100 rallied now that mid-term election results are emerging largely as expected. Faith in the primary up-trend is growing but it will take several weeks, if not months, for confidence to be restored and memory of the correction to fade. Hesitancy and a second test of new support at 6600/6700 are likely. There are few “V-shaped” corrections of this magnitude. Most are “W-shaped”, as in the first quarter.

Nasdaq 100

The S&P 500 displays a similar rally but it will take time for Twiggs Money Flow to break the descending trendline and signal that buying strength is restored. Expect another test of support at 2600/2650.

S&P 500

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Buckley’s chance that rate hikes will slow

Average hourly wage rates are rising, with Production & Non-Supervisory Employees growing at an annual rate of 3.20% and All Employees at 3.14%.

Average Hourly Wage Rate

This is a clear warning to the Fed that underlying inflationary pressures are rising. There is Buckley’s chance* that they will ease off on rate hikes.

The Fed adopts a restrictive stance whenever hourly wage rate growth exceeds 3%, illustrated below by a high or rising Fed Funds Rate.

Average Hourly Wage Rate

The market is adopting a wait-and-see attitude ahead of Tuesday’s mid-term elections. Stocks like Apple (AAPL) have been sold down on strong volume despite good earnings results: earnings per share of $2.91 and revenue of $62.9 billion for Q4-18, compared to consensus estimates of $2.79 and $61.5 billion.

Apple

Optimism over a possible trade deal with China may not last the week.

A harami-like candle on the S&P 500 reflects indecision, while bearish divergence on Twiggs Money Flow warns of long-term selling pressure. Breach of 2550 is still unlikely but would warn of a primary down-trend.

S&P 500

The Nasdaq 100 tells a similar story, with primary support at 6300.

Nasdaq 100

* William Buckley was an English convict transported to Australia. He escaped when the ships laid anchor in Port Phillip Bay in 1803. The nearest permanent settlement, Sydney, was more than 1000 km away and, considered to have no chance of survival, he was given up for dead. Thirty-two years later, having lived among the Wathaurung Aboriginal people, he emerged from the bush when a settlement was established at Port Phillip in 1835. “Buckley’s chance” is an Australian colloquialism meaning having no chance at all.

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