Category: Countries & Regions

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ASX 200 bear rally

Credit growth in Australia is falling (with help from the Royal Commission) and broad money growth is anemic, below the lows of the GFC, warning that the economy is close to a contraction.

RBA: Credit & Broad Money

Banks are particularly vulnerable because of the falling housing market. The bubble threatens to burst after a long expansion and the RBA is low on ammunition. How many rate cuts do you think they have left in reserve?

The ASX 200 Financials Index is testing long-term support at 5400. Declining Momentum peaks warn of a bear market. Breach of support is likely to lead to another decline, with a long-term target of 4000.

ASX 200 Financials Index

The Resources sector is in far better shape but the ASX 200 Materials Index is also slowing, with a strong bearish divergence on 13-week Momentum. Reversal below primary support at 11000 would confirm a primary down-trend.

ASX 200 Materials

The ASX 200 is testing resistance at the former band of primary support between 5650 and 5800 (revised up from 5750). The rally could go further, possibly as high as 6150, but this is a bear market and the probability that this rally will change that is low. Respect of resistance is likely and reversal below 5650 would confirm the bear market for Australian stocks. Initial target for a primary decline is 5000.

ASX 200

Our hope is that China rescues us with another massive stimulus spend,  as in the GFC, lifting the resources sector. But hope isn’t a strategy.

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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It’s a funny kind of bear market

The US economy continues to show signs of robust good health.

Total hours worked are rising, signaling healthy real GDP growth.

Real GDP and Total Hours Worked

Growth in average hourly wage rates is rising, reflecting a tighter labor market. Underlying inflationary pressures may be rising but the Fed seems comfortable that this is containable.

Average Hourly Wage Rates

The Leading Index from the Philadelphia Fed maintains a healthy margin above 1.0% (below 1% is normally a signal that the economy is slowing).

Leading Index

But market volatility remains high, with S&P 500 Volatility (21-day) above 2.0%. A trough above 1% on the next multi-week rally would confirm a bear market — as would an index retracement that respects 2600.

S&P 500

The Nasdaq 100 is undergoing a similar retracement with resistance at 6500.

Nasdaq 100

The primary disturbance is the trade confrontation between the US and China. There is plenty of positive spin from both sides but I expect trade negotiations to drag out over several years — if they are successful. If not, even longer.

I keep a close watch on the big five tech stocks as a barometer of how the broader market will be affected. So far the results are mixed.

Apple is most vulnerable, with roughly 25% of projected sales to China. Recent downward revision of their sales outlook warns that Chinese retail sales are falling. AAPL is testing its primary support level at 150.

ASX 200

Facebook and Alphabet are largely unaffected by a Chinese slowdown, but have separate issues with user privacy. Facebook (FB) is in a primary down-trend.

ASX 200

While Alphabet (GOOGL) is testing primary support at 1000.

ASX 200

Amazon (AMZN) is similarly isolated from a Chinese slow-down although there may be a secondary impact on suppliers. Primary support at 1300 is likely to hold.

ASX 200

Microsoft (MSFT) is the strongest performer of the five. Their segment reporting does not provide details of exposure to China but it appears to be a small percentage of total sales.

ASX 200

The outlook for stocks is therefore mixed. Be cautious but try to avoid a bearish mindset, where you only see problems and not the opportunities. Even if China does suffer a serious slowdown we can expect massive stimulus similar to 2008 – 2009, so the impact on developing markets and resources markets may be cushioned.

Best wishes for the New Year.

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ASX awaits bear market confirmation

The ASX 200 is testing the former band of primary support between 5650 and 5750. Respect is likely and would confirm a bear market for Australian stocks. Target for a primary decline is 5000.

ASX 200

ASX 300 Metals & Mining Index is testing primary support at 3400. Declining Trend Index peaks warn of selling pressure. Breach of 3400 would confirm a primary down-trend, strengthening the bear signal.

ASX 300 Metals & Mining

House prices are falling but this has not yet had an impact on the record high ratio of household debt to disposable income. Wages growth is slow and it will take a long time for debt ratios to return to saner levels. Expect the housing bear market to last for a similar length of time unless the RBA is desperate enough to make further rate cuts.

RBA: Credit & Broad Money

Bank performance is closely aligned with the housing market. The ASX 300 Banks Index is testing long-term support at 7000. Declining Trend Index peaks warn of selling pressure. Breach of support at 7000 is likely to lead to another decline, with a long-term target of 5000.

ASX 300 Banks Index

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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Significant divergence

Market commentators are sifting through the data, looking for reasons to explain the sharp sell-off in stocks over the last two months. But everything they examine is likely to be shaded by their bear-tinted spectacles after the S&P 500 broke primary support at 2550.

S&P 500

The Nasdaq 100 also broke primary support, confirming the bear market.

Nasdaq 100

Of the big five tech stocks, Apple and Google are both testing primary support, threatening to follow Facebook into a primary down-trend. If the two break primary support, that would further strengthen the bear signal.

Big Five tech stocks

Volatility (21-day) is now close to 2% but the key is how volatility behaves on the next multi-week rally. If volatility forms a trough above 1% that would confirm the elevated risk.

S&P 500

Divergence? What Divergence?

Why do I say there is a significant divergence? Look at the fundamentals.

Fedex has just released stats for its most recent quarter, ended November 30. Package volumes are rising, not falling.

Fedex Stats

Supported by a very bullish Freight Transportation Index.

Freight Transportation Index

Consumption is strong, with Services and Non-durable goods rebounding. No sign of a recession here.

Consumption

Light vehicle sales are at a robust annual rate of 17.5 million.

Light Vehicle Sales

Retail sales growth (ex motor vehicles and parts) weakened in the last month but is still in an up-trend.

Retail

Housing starts and authorizations are still climbing.

Housing

Real construction spending (adjusted by CPI) is strong.

Construction

Manufacturers new orders (ex defense and aircraft) have rebounded after a weak 2015 – 2016.

Manufacturers New Orders

Corporate investment is growing at a faster rate than the economy, with rising new capital formation over GDP.

New Capital Formation

The Fed is shrinking its balance sheet which is expected to impact on liquidity. But commercial banks are running down excess reserves on deposit at the Fed at a faster rate, so that Fed assets net of excess reserves (green line) is actually rising. Hardly a drain on liquidity.

Fed Balance Sheet

Market pundits are watching the yield curve with bated breath, waiting for the 10-year to cross below the 2-year yield.

Yield Differential 10-Year minus 2-Year

In the past this has served as a reliable early warning, normally 12 to 24 months ahead of a recession. But the St Louis Fed Financial Stress Index is well below zero, signaling an accommodative financial environment.

Financial Stress Index

Why the mismatch? Fed actions — QE, Operation Twist, and even steps to shrink its balance sheet — have all suppressed long-term interest rates. We need to be wary of taking signals from a distorted yield curve.

Why have stocks reacted?

This is not a Pollyanna outlook. Never argue with the tape — we are clearly in a bear market. So why are stocks diverging from the economy?

The answer is China.

The impact of a trade war with the US would most likely cause a recession in China. Oil prices are already plunging in anticipation of falling demand.

Nymex Light Crude and Brent Crude

Commodities are likely to follow.

DJ UBS Commodities Index

The impact of a Chinese recession would be felt around the globe. Europe has its own problems and could easily follow.

DJ Europe Financial Index

The US is likely to emerge relatively unscathed but Wall Street is going to be exceedingly cautious until some semblance of normality is restored.

I do not suggest selling all your stocks but make sure that there is enough cash in the portfolio to take advantage of opportunities when they arise.

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ASX 200 weighed down by banks

The ASX 200 respected the new resistance level at 5650, confirming a primary down-trend. Target for the decline is 5000.

ASX 200

The ASX 300 Banks Index broke long-term support at 7000, warning of another decline. Trend Index peaks below zero indicate selling pressure. Expect retracement to test the new resistance level but respect is likely and would confirm a long-term target of 5000.

ASX 300 Banks Index

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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Risk averse rather than fearful

The S&P 500 is again testing the band of primary support between 2600 and 2550. Follow-through below this level would warn of a bear market. Volatility (21-day) is in the amber zone between 1% and 2%. A real test of market resilience will be the next sizable rally or advance. If declining volatility remains above 1%, that would warn of an imminent market sell-off.

S&P 500

The Nasdaq 100 is in a similar position, with declining Money Flow warning of medium-term selling pressure.

Nasdaq 100

Of the big five tech stocks, only Microsoft looks strong. Facebook is in a primary down-trend but Apple and Google are testing primary support. Apple’s exposure to China is obviously a concern. China accounts for roughly 25% of Apple’s global market but Apple estimates that it is responsible for 4.8 million jobs in China which gives them some negotiating clout.

Big Five tech stocks

If two more of the big five broke primary support, that would in my opinion signal a bear market.

Asia

The Shanghai Composite Index is consolidating in a narrow band below 2700. Downward breakout is likely and would signal another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is testing resistance at 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Europe

Dow Jones Euro Stoxx is in a primary down-trend. Follow-through below 350 confirms a bear market, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie also broke primary support at 6900. Retracement is testing the new resistance level but respect of 7000 is likely and would confirm a bear market, with a target between 5600 and 6000.

FTSE 100

There is a high level of uncertainty in global markets at present. Europe has Brexit and Italy. The US has investigations into Donald Trump’s election campaign. China has the threat of a trade war with the US. But my sense is that the market has become risk averse rather than fearful. There is no sign of panic selling as yet. But investors are clearly on the defensive and prepared to sell off vulnerable stocks.

Adopt the pace of nature: her secret is patience.

~ Ralph Waldo Emerson

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ASX 200 breaks support

The ASX 200 broke primary support at 5650, signaling a down-trend. Trend Index peaks at zero warn of selling pressure. Expect retracement to test the new resistance level but respect of 5750 is likely and would confirm a bear market. Target for a primary decline is 5000.

ASX 200

ASX 300 Metals & Mining Index found support at 3400 but declining Trend Index peaks warn of selling pressure. Follow-through below 3400 would confirm a primary down-trend.

ASX 300 Metals & Mining

A falling housing market and declining construction are dragging the market lower. Banks are the catalyst. Tightening credit standards in response to the Royal Commission and pressure from APRA are slowing lending and likely to lead to a contraction. Broad money growth is slowing sharply.

RBA: Credit & Broad Money

Unfortunately the alternative is far worse. A blow-off of the credit-fueled property bubble would threaten stability of the financial system.

The ASX 300 Banks Index broke long-term support at 7000, warning of another decline. Trend Index peaks below zero indicate selling pressure. Expect retracement to test the new resistance level but respect is likely and would confirm another primary decline. The long-term target is 5000.

ASX 300 Banks Index

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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