Category: Stock Markets

Analysis of major stock markets around the world.

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ASX 200: Stubborn resistance

Iron ore is headed for another test of short-term support at $90. Breach would signal another decline, with a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index retreated this week and is expected to test long-term support at 4100. Breach would complete a head and shoulders reversal, with a target of 3400.

ASX 300 Metals & Mining

The Financial sector is testing resistance at 6500, with short candles indicating hesitancy.

ASX 200 Financials

With building approvals falling, expect housing to remain a drag on growth in the medium-term — unless the RBA & APRA go all-in on interest rates and macro-prudential to rescue the housing bubble.

Australia Private Residential Building Approvals

The ASX 200 is testing resistance at the 2007 high of 6800. Short candles warn of stubborn resistance. Reversal below 6400 remains unlikely but would signal a decline to test primary support at 5400.

ASX 200

We maintain exposure to Australian equities at 25% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish long-term outlook.

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The canary in the coal mine

Bellwether transport stock Fedex (FDX) is testing long-term support at 150. Peaks close to zero on the Trend Index warn of selling pressure. Breach of support would warn of a decline with a long-term target of 100.

Fedex

Breach of LT support would also be a bearish sign for the US economy, warning that economic activity is weakening.

The S&P 500 is testing resistance at 3000. Expect stubborn resistance followed by a test of support at 2800. Breach of 2800 would flag a reversal with a target of 2400.

S&P 500

Dow Jones – UBS Commodity Index rallied strongly with the Saudi oil price shock but finished the week with a strong bearish reversal signal. Expect another test of support at 76. Breach would signal a (primary) decline. We maintain our bearish long-term outlook for commodities.

DJ-UBS Commodities Index

We have reduced our equity exposure to 36% of (International Growth) portfolio value because of our bearish outlook on the global economy.

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ASX 200 tests resistance, Iron ore tests support

Iron ore found resistance at $95/ton and is likely to again test short-term support at $90. Support is unlikely to hold and breach would offer a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index found support at 4100 but the rally is weak. Breach of 4100 would complete a head and shoulders reversal, giving a target of 3400.

ASX 300 Metals & Mining

A fall in iron ore prices would increase downward pressure on the Aussie Dollar.

The Financial sector continues to look bullish, testing resistance at 6500, with Trend Index troughs above zero indicating buying pressure. Housing woes are far from over, despite improved auction clearance rates, and we expect the sector to remain a drag on growth for the next three to five years — unless the RBA & APRA go “all-in” on a housing bubble to “rescue” the economy.

ASX 200 Financials

The ASX 200 is edging upwards, towards a test of resistance at the 2007 high of 6800. Expect stubborn resistance. Reversal below 6400 would warn of a decline to test primary support at 5400.

ASX 200

We maintain exposure to Australian equities at 25% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish long-term outlook.

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Witching hour on Friday

“Witching hour” refers to the last hour of trading on days, normally the third Friday of the month, when there is a simultaneous expiry of options and futures in derivatives markets. Traders who don’t roll-over into a new contract are forced to cover their positions, which can lead to massive intra-day volatility in underlying markets.

“Quadruple witching” happens four times each year — on the third Friday of March, June, September, and December — when index futures, index options, stock futures, and stock options expire simultaneously. With that level of futures and options expiring, trading volume in equities usually spikes in the last hour.

Spot the June and September witching hours on the chart below.

Witching Hour June & September 2018

Note that June had witching hours on Friday 15th and 22nd. Also note that there was not a lot of price movement despite the heavy trading volumes. That’s not to say that witching hour is incapable of disrupting an already unstable market but it’s unlikely to have a long-term impact if conditions are settled.

After the liquidity squeeze earlier this week, it’s important to keep an eye on this.

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S&P 500: Upside limited, while downside risks grow

Corporate profits (before tax) ticked up slightly in the second quarter of 2019 but remain below 2006 levels in real terms. The chart below shows corporate profits adjusted for inflation using the GDP implicit price deflator.

Real GDP and Hours Worked

Growth in production of durable consumer goods remains week, reflecting poor consumer confidence.

Durable Goods Production

The chart below shows growth in bank credit and the broad money supply (MZM plus time deposits). Credit growth (blue) remains steady at around 5%, slightly ahead of nominal GDP growth (4.04% for 12 months ending June); a healthy sign. Broad money (green) surged upwards in the first three quarters of this year. Not an encouraging sign when there were similar surges in broad money before the last two recessions.

Broad Money & Credit Growth

The S&P 500 is testing resistance at 3000. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure. Expect a test of support at 2800. Breach would flag a reversal, with a target of 2400.

S&P 500

The cyclical Retailing Index displays a similar pattern, with resistance between 2450 and 2500.

Retail

Our view is that upside is limited, while downside risks are growing.

On the global front, the outlook is still dominated by the prospect of a prolonged US-China trade war. More great insights from Trivium China:

Tariff delays may be aimed at creating warm, fuzzy feelings before the next round of talks in early October, but……These small gestures do nothing to resolve the underlying trade conflict. We’re still pessimistic on prospects for a deal.

Zhou Xiaoming – China’s former top diplomat in Geneva – expressed the same view in a recent interview (Guancha):
“The two sides disagree too much on the objectives of the negotiations……It is almost impossible to reach an agreement in the short term.”

Zhou urged Chinese officials to be clear on the US’s objective:
“Economic and technological decoupling is the objective of the entire US government.”

Zhou said that officials must prepare for that potentiality, even if it is not their desired outcome.

So should we.

Dow Jones – UBS Commodity Index found support at 76 before rallying to 79. Rising troughs on the Trend Index reflect increased support. Consolidation between 76 and 81 is likely but we maintain our bearish long-term outlook for commodities.

DJ-UBS Commodities Index

On the global front, weak crude oil prices flag an anticipated slow-down in the global economy. Trend Index peaks below zero indicate selling pressure. Breach of support at $50/$51 per barrel would be a strong bear signal, warning of a decline to $40 per barrel.

Nymex Light Crude

We maintain our investment in quality growth stocks but have reduced equity exposure to 40% of (International Growth) portfolio value.

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ASX: Iron Ore expected to decline to $55 per ton in next five years

Iron ore found short-term support at $90 per ton but this is unlikely to hold and our medium-term target is $80 per ton.

Iron Ore

Bloomberg published an interesting outlook on iron ore this week from Ed Morse, Global Head of Commodities Research at Citigroup:

“Steel demand is no longer going to be what it was,” Morse said in an interview. “No combination of India, Brazil and any other emerging-market country, no matter how big, is going to replace what China did alone,” he said, referring to spike in demand from the nation’s “fixed-asset investment extravaganza,” between the 1990s to 2010.

….Benchmark prices will end this year at the mid-$90s a ton, before falling to $75 at the end of 2020, he said. Five years out, they are seen at $55 a ton — a level that’s still well above current costs of production at the largest miners.

The ASX 300 Metals & Mining index found support at 4100 but the outlook is increasingly bearish. Breach of 4100 would complete a head and shoulders reversal with a target of 3400.

ASX 300 Metals & Mining

Given the importance of mining exports to the Australian economy, a fall in iron ore prices would be likely to increase downward pressure on the Aussie Dollar.

The Financial sector, on the other hand, is looking bullish at present, with Trend Index troughs above zero indicating buying pressure, in response to improved auction clearance rates. But housing woes are far from over and we expect them to remain a drag on growth for the next three to five years.

ASX 200 Financials

The ASX 200 continues to edge upwards, heading for another test of resistance at its 2007 high of 6800. Hanging man candles over the last three weeks warn of profit-taking, which is slowing the rally’s progress. Expect stubborn resistance at 6800. Reversal below 6400 would warn of a decline to test primary support at 5400.

ASX 200

We increased exposure to Australian equities, to 25% of portfolio value, this week but with an increased focus on defensive stocks, because of our bearish outlook.

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Time to be defensive

Bob Doll at Nuveen says he does not expect a recession (for the next few quarters) but remains neutral towards stocks:

“Although stock prices have advanced over the last couple of weeks, investors remain focused on downside economic and policy risks and are increasingly concerned about a possible recession. The latest manufacturing readings hurt economic sentiment, while trade issues, turmoil in Hong Kong, the increasing likelihood of a messy, no-deal Brexit and a downturn in European growth are increasing worries.”

The Institute for Supply Management August Report points to an economic slow-down, with the Purchasing Managers’ Index (PMI) falling to 49.1 percent, from 51.2 percent in July. The New Orders Index also declined, to 47.2 percent from 50.8 percent in July. Readings below 50 indicate contraction.

“…The 2020 U.S. elections linger in the backdrop, offering potential to produce either a dramatic shift in economic policy should the Democrats retake the White House, or continued policy uncertainty should President Trump win reelection.

Against this backdrop, investors are struggling to position their portfolios. Consensus appears to say that it is time to turn more defensive, but U.S. Treasuries and other government bond yields appear to offer little if any value. Indeed, government bond markets are pricing in a high likelihood of a recession and a prolonged period of sluggish growth. At the same time, equity markets have been range bound over the last several months (and, by some measures, since the start of 2018) and are providing unclear signals.

In our view, the preponderance of the evidence suggests that growth will remain sluggish but a recession will be avoided, at least for the next few quarters. In other words, we think the signals coming from the equity markets are more accurate than those coming from government bond markets. Nevertheless, we continue to have a broadly neutral view toward stocks, and think investors should remain selective, focusing on such themes as companies that offer compelling value and those that have the ability to put relatively high levels of free cash flow to work.”

The wild card is the impact that high levels of uncertainty may have on business investment and employment.

Google Searches for Recession

This is a time to be defensive.

Bonds, traditional dividend-paying blue chips, and growth stocks all appear over-priced at current levels. Small caps are high risk in the current volatile environment and we are focused on large cap stocks with strong cash flows and defensible market position in non-cyclical industries. Some cyclical sectors may present value but investors need to be selective because of vulnerability to a potential down-turn.

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S&P 500 buying pressure but payrolls disappoint

August labor stats, released today, point to low real GDP growth for Q3. Growth in weekly hours worked came in at a low 1.09% and GDP is likely to follow.

Real GDP and Hours Worked

While inflation is not the primary concern at the Fed right now, rising annual hourly wage rate growth (3.46% for total private) flags an increase in underlying inflationary pressure. This may make the Fed more hesitant about cutting rates despite Donald Trump’s tweet storm.

Average Hourly Wage Rate

Most important is the continued decline in annual payroll growth. At 1.38% for August, further weakness is likely and a fall below 1.0% would warn of an economic slow-down.

Real GDP and Hours Worked

The S&P 500 is headed for another test of resistance at 3000. The Trend Index oscillating above zero for the last 9 months indicates buying pressure but I expect strong resistance at 3000. Upside is limited while downside risks are expanding.

S&P 500

Semiconductors are doing better than expected, despite the trade war, but I suspect will weaken when the surge in orders ahead of tariffs tails off.

Semiconductors

Retail has stalled since late 2018 and bearish divergence on the Trend Index suggests selling pressure.

Retail

Automobiles, in a decline since 2017, have rallied over the last 6 months. But, again, further weakness is expected.

Automobiles

On the global front, weak crude oil prices flag an anticipated slow-down in the global economy. Breach of support at $50/$51 per barrel would be a strong bear signal, warning of a decline to $40 per barrel.

Nymex Light Crude

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

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ASX: Expect stubborn resistance

Iron ore continues to edge downwards after a sharp fall. This is a continuation pattern and our short-term target is $80/tonne.

Iron Ore

The Materials index found support at 12500/12700 but the outlook is increasingly bearish. We need to be alert for a possible head and shoulders reversal with a break below 12500.

Materials

The ASX 200 is edging upwards, towards another test of resistance at its 2007 high at 6800. A Trend Index trough above zero signals buying pressure but hanging man candles for the last two weeks warn of reversal. Expect stubborn resistance at 6800.

ASX 200

We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.

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S&P 500: Donald Trump and the next recession

Treasury yields continue to fall, with the 10-Year testing long-term lows at 1.50%. A sign that investors are growing increasingly risk averse.

10-Year Treasury Yields

Crude oil prices remain weak; a bearish signal for the global economy. Breach of support at $50/$51 per barrel would warn of a decline to $40.

Nymex Light Crude

Volatility (21-Day) above 1.0% on the S&P 500 is flashing an amber warning. Breakout above 2940 is likely and would signal another test of 3000. But expect stubborn resistance at our 3000 target level.

S&P 500 Volatility

Bearish divergence (13-Trend Index) on the Nasdaq 100 warns of secondary selling pressure. Breach of 7400 would warn of a test of primary support at 7000.

Nasdaq 100

Robert Shiller maintains that Donald Trump is unlikely to survive a recession:

“So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn….the end of confidence in Trump’s narrative is likely to be associated with a recession.

During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.”

I would go further and argue that Trump’s management style is likely to cause a recession.

Some of the aims the President is attempting, like addressing China’s unfair trade practices, are vitally important to long-term US interests and he should be given credit for tackling them. But his constant hyperbole, erratic behavior, with a constant mix of bouquets and brickbats, and on-again-off-again tactics, has elevated global uncertainty. Consumers are likely to increase savings and cut back on expenditure, while corporations may cut back on hiring and new investment, which could tip the economy into recession.

GDP growth contracted to 2.3% in the second quarter, while growth in hours worked contracted to 0.92% for the year ended July 2019, pointing to further falls in GDP growth for the third quarter.

Real GDP and Hours Worked

August employment figures are due for release next week and will either confirm or allay our fears.

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

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