Analysis of major stock markets around the world.
The Nasdaq 100 broke through resistance at 7000. Expect retracement to test the new support level but respect is likely and would signal a primary advance with a target of 7700.
The S&P 500 respected support at 2700. Follow-through above 2750 would signal another test of 2850.
Volatility is falling and a dip below 1.0% would suggest that the market has returned to business as usual.
Banks continue to threaten mayhem, with the ASX 300 Banks Index headed for a target of its 2016 low at 7200.
The second biggest industry group, Metals & Mining Index, however, remains in a primary up-trend. A long tail on the ASX 300 Metals & Mining weekly chart reflects support at 3800 and another test of 4000 is likely.
The ASX 200 continues to display a large bearish divergence on Twiggs Money Flow (13-week), warning of selling pressure. Breach of 5950 would warn of a test of primary support at 5650/5750.
I expect a gradual decline in the index unless mining falters. In which case all bets are off.
10-Year Treasury yields retreated below 3.0 percent after threatening a bond bear market for the past week.
Breakout above 3.0 percent would complete a large double bottom reversal in the secular down-trend.
Rising bond yields would be expected to weaken demand for gold as the opportunity cost of holding precious metals increases.
The other major influence on gold prices, the Dollar, continues to strengthen. A strong Dollar would weaken the Dollar-price of gold.
The Dollar Index is rallying to test resistance at 95. Penetration of the long-term descending trendline in April suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.
Spot Gold retraced to test the new resistance level at $1300/ounce — the former support level. The declining Trend Index indicates selling pressure and respect of the descending trendline would warn of a test of primary support at $1250/ounce.
Australian gold stocks fared better, with the All Ordinaries Gold Index finding support at 4950 and the rising Trend Index signaling buying pressure. Respect of the long-term trendline would confirm another primary advance.
The reason is not hard to find. The Australian Dollar is at a watershed, testing primary support at 75 US cents as the greenback rallies. A Trend Index peak below zero would warn of strong selling pressure. And breach of primary support would signal a decline to 69/70 US cents.
Offering a potential bull market for Aussie gold stocks.
Banks face continued selling pressure as the Royal Commission progresses. The ASX 300 Banks Index broke medium-term support at 7700, confirming the primary down-trend and a target of the 2016 low at 7200.
Financials are the largest sector in the ASX 200. Materials, consisting of mainly Metals & Mining are second.
Source: S&P Dow Jones Indices
The ASX 300 Metals & Mining Index remains in a primary up-trend but threatens a correction to test the long-term rising trendline. Respect of the trendline is likely and would signal continuation of the up-trend. Breach of 3400 is unlikely but would present a bearish outlook, not only for Metals & Mining, but the entire ASX.
The ASX 200 is correcting to test medium-term support at 5950. Breach would warn of a test of primary support at 5750 but respect of support is just as likely. Breakout from the triangle on Twiggs Money Flow (13-week) will indicate the likely direction.
Now that 93% of S&P 500 stocks have reported first quarter earnings we can look at price-earnings valuation with a fair degree of confidence. My favorite is what I call PEMax, which compares Price to Maximum Annual Earnings for current and past years. This removes distortions caused by periods when earnings fall faster than price, by focusing on earnings potential rather than necessarily the most recent earnings performance.
Valuations are still high, but PEMax has pulled back to 22.78 from 24.16 in the last quarter. Valuations remain at their highest over the last 100 years at any time other than during the Dotcom bubble. Even during the 1929 Wall Street crash (Black Friday) and Black Monday of October 1987, PEMax was below 20.
While that warns us to be cautious, as valuations are high, it does not warn of an imminent down-turn. Markets react more to earnings than to prices as the chart below illustrates.
The last two market down-turns were both precipitated by falling earnings — the blue columns on the above chart — rather than valuations.
While it is concerning that prices have run ahead of EPS — as they did during the late 1990s — consolidation over the past quarter should allow earnings room to catch up.
The S&P 500 has broken out above its symmetrical triangle and we are now witnessing retracement to test the new support level at 2700. Volatility is falling and a dip below 1.0% would suggest that the market has returned to business as usual.
Twiggs Money Flow remains a respectable distance above the zero line and is flattening out. Breach of primary support at 2550 seems unlikely.
At times it pays to look at the big picture. A monthly chart shows the ASX 200 recovering from 2 months of uncertainty (February – March), when the index broke its new support level at 6000. Recovery is almost complete, with the index testing the last level of resistance at 6150. Breakout would signal a primary advance but bearish divergence on Twiggs Money Flow (13-week) warns of selling pressure. Another test of support at 6000 is likely.
The ASX faces a bi-polar medium-term outlook with its two largest sectors headed in opposite directions.
Source: S&P Dow Jones Indices
Mining is going gang-busters with the ASX 300 Metals & Mining Index offering a medium-term target of 4200 after breaking through 3800.
But the largest sector, Finance, is in trouble. The impact of the Royal Commission is likely to slow bank lending growth and APRA’s efforts to raise bank lending standards will also adversely affect declining housing growth. The ASX 300 Banks Index remains in a primary down-trend, having broken support at 8000. Retracement respected the new resistance level at 8000 and breach of support at 7700 would signal a test of the 2016 low at 7200.
The Dollar rally continues, with the Dollar Index heading for a test of resistance at 95. Penetration of the long-term descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.
But rising crude prices still threaten to weaken the Dollar.
Spot Gold broke support at $1300, warning of a test of primary support at $1250/ounce as the Dollar strengthens. The declining Trend Index indicates selling pressure.
A weakening Australian Dollar continues to test support at 75 US cents as the greenback rallies. Breach would offer a long-term target of 69/70 US cents.
The weaker Aussie Dollar offered some respite for local gold stocks but the All Ordinaries Gold Index is retracing to test its new support level at 4950/5000. Respect of the rising trendline would confirm a fresh advance and long-term target of 6000.
A sign of the economy’s good health is the largess distributed in Treasurer Scott Morrison’s recent budget, without wrecking the fiscal balance sheet. Net Debt is projected to peak at 18.6 percent of GDP in 2017/2018, with the budget returning to surplus in 2019/2020.
Source: Budget.gov.au
The ASX 200 is testing resistance at 6100/6150 despite the weakening Australian Dollar and troubled banking sector. Breakout above 6150 would signal a primary advance.
Led by the ASX 300 Metals & Mining Index. Breakout above 3800 signals a fresh primary advance, with a medium-term target of 4200.
But the ASX 300 Banks Index is in a primary down-trend, having broken support at 8000. Retracement that respects the new resistance level at 8000/8100 is likely and would confirm a primary down-trend with a medium-term target of the 2016 low at 7200.
We have a bi-polar economy, with Resources exports surging, along with Services and Rural (agriculture). Manufacturing exports are the only flat spot.
But the banking sector faces challenges from a threatened housing down-turn, with near zero house price growth, and a regulator racing to shore up bank balance sheets before the bubble bursts.
The ASX 200 is testing resistance at 6100/6150 despite a weakening Australian Dollar and a troubled banking sector. Breakout above 6150 would signal a welcome fresh advance.
Source: S&P Dow Jones Indices
But I remain skeptical because the largest sector, Financials — whose market cap is a third of the entire index — is in trouble. The ASX 300 Banks Index is in a primary down-trend, having broken support at 8000. Retracement that respects the new resistance level at 8000/8100 would confirm a primary down-trend, with a medium-term target of the 2016 low at 7200.
Miners, on the other hand, have recovered. Breakout above 3800 would signal a fresh advance, with medium-term a target of 4200.
