Category: Stock Markets

Analysis of major stock markets around the world.

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Small caps lead US recovery

Russell 2000 Small Caps Index is leading the US recovery. The iShares Russell 2000 Small Caps ETF broke through resistance at 160, signaling a primary advance with a target of 175. According to Dow Theory, small capitalization stocks typically lead the advance in stage 3 of a bull market, with large caps having exhausted their gains.

iShares Russell 2000 Small Caps ETF

But Charles Dow did not have to contend with technology stocks which are a law unto themselves. The Nasdaq 100 broke through resistance at 7000 and is currently retracing to test the new support level. Respect is likely and would signal a primary advance with a target of 7700.

Nasdaq 100

The S&P 500 is further behind, headed for a test of resistance at 2800. Breakout would signal a primary advance with a target of 3000.

S&P 500

Bellwether transport stock Fedex is also recovering, having broken resistance at 256. A bullish sign for the broad economy. Expect a test of resistance at 274/275.

Fedex

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Nasdaq bull signal

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.

Nasdaq 100

The S&P 500 respected support at 2700. Follow-through above 2750 would signal another test of 2850.

S&P 500

Volatility is falling and a dip below 1.0% would suggest that the market has returned to business as usual.

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Bi-polar ASX continues

Banks continue to threaten mayhem, with the ASX 300 Banks Index headed for a target of its 2016 low at 7200.

ASX 300 Banks

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.

ASX 300 Banks

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.

ASX 200

I expect a gradual decline in the index unless mining falters. In which case all bets are off.

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Falling bond yields fail to tame Gold bears

10-Year Treasury yields retreated below 3.0 percent after threatening a bond bear market for the past week.

10-Year Treasury Yield

Breakout above 3.0 percent would complete a large double bottom reversal in the secular down-trend.

10-Year Treasury Yield

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.

Dollar Index

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.

Spot Gold

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.

All Ordinaries Gold Index

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.

AUDUSD

Offering a potential bull market for Aussie gold stocks.

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Banks hurt the ASX

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.

ASX 300 Banks

Financials are the largest sector in the ASX 200. Materials, consisting of mainly Metals & Mining are second.

ASX 200
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.

ASX 300 Banks

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.

ASX 200

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Price & Earnings: The Race to the Top

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.

PE of Maximum Earnings

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.

S&P 500 Earnings per Share Growth

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.

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S&P 500: Volatility falling

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.

S&P 500

Twiggs Money Flow remains a respectable distance above the zero line and is flattening out. Breach of primary support at 2550 seems unlikely.

S&P 500

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ASX 200 tug-of-war

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.

ASX 200

The ASX faces a bi-polar medium-term outlook with its two largest sectors headed in opposite directions.

ASX 200
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.

ASX 300 Banks

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.

ASX 300 Banks

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Gold stocks retreat

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.

Dollar Index

But rising crude prices still threaten to weaken the Dollar.

WTI Light Crude

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.

Spot Gold

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.

AUDUSD

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.

All Ordinaries Gold Index

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ASX 200: Bi-polar economy

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.

2018/2019 Budget Net Debt and Fiscal Deficit/Surplus
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.

ASX 200

Led by the ASX 300 Metals & Mining Index. Breakout above 3800 signals a fresh primary advance, with a medium-term target of 4200.

ASX 300 Banks

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.

ASX 300 Banks

We have a bi-polar economy, with Resources exports surging, along with Services and Rural (agriculture). Manufacturing exports are the only flat spot.

Export Volumes

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.

Housing Price Growth

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