ASX signals a bear market

The ASX 200 broke support at 7200, signaling a primary down-trend. The declining Trend Index has warned of fading buying pressure for several months. Expect retracement to test the new 7200 resistance level but respect is likely and would confirm the primary down-trend.

ASX 200
The largest sector, Financials, similarly broke support at 6250 and we expect retracement to test the new resistance level.

ASX 200 Financials
The ASX 300 Metals & Mining Index encountered resistance at 6000 but remains in an up-trend. Another test of 4750 is likely.

ASX 300 Metals & Mining
The All Ordinaries Gold Index retreated this week, under the weight of a broad equities sell-off, but a rising Trend Index continues to flag buying pressure.

All Ordinaries Gold Index
Gold priced in Australian Dollars continues to trend upwards, the recent shallow trough having respected support at 2500. Target for the advance is 2800.

Gold in Australian Dollars
Conclusion

The ASX 200 breach of support at 7200 warns of a bear market; retracement that respects the new 7200 resistance level would confirm. Financials also warn of a bear market, while the Metals & Mining sector is likely to test support at 4750. The All Ordinaries Gold Index is retreating to test support at 6000 but this should present a buy opportunity as the Australian Dollar price of Gold continues in an up-trend.

ASX mixed signals

Residential mortgage activity is recovering in response to recent rate cuts. Buyers are unable to resist the ultra-low finance costs, while APRA is sitting on its hands regarding macro-prudential measures (e.g. reducing maximum LVRs) to prevent another credit/housing bubble. Again, we see a two-speed economy, with mortgage stress in newer suburbs and inner-city units, where homeowners are unable to take advantage of lower rates, and rising prices in older, more established suburbs with lower mortgage exposure.

ASX 200 Financials index is testing resistance at 6500. Higher troughs on the Trend Index indicate buying pressure. There is no sign of a reversal at present but keep a weather eye on primary support at 6000; breach would warn of a primary decline with a target of 5200.

ASX 200 Financials

Banks face headwinds from pressure on interest margins, increased competition from disruptors in the form of neobanks (digital banking service providers), and demands to increase capital buffers which could lead to dividend cuts.

Iron ore is testing support at 90. Breach of support would warn of a decline with a long-term target of 65.

Iron Ore

ASX 300 Metals & Mining index is testing support at 4100, the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index signal selling pressure. Breach of support would warn of a decline with a target of 3400.

ASX 300 Metals & Mining

REITs recovered slightly from their recent sell-off but downside risk remains. Breach of support at 1600 would warn of a decline to 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but the Trend Index also shows declining peaks, warning of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

ASX and 3 headwinds

Despite recent strong performance, investor enthusiasm may be cooling, with the Australian economy facing three headwinds.

Declining Household Spending

Household income growth is faltering and weighing down consumption. Household spending would have fallen even further, dragging the economy into recession, if households were not digging into savings to maintain their living standards.

Australia: Disposable Income, Consumption and Savings

But households are only likely to draw down on savings when housing prices are high. Commonly known as the “wealth effect” there is a clear relationship between household wealth and consumption. If housing prices were to continue falling then households are likely to cut back on spending and boost savings (including higher mortgage repayments).

Consumption is one of the few remaining contributors to GDP growth. If that falls, the economy is likely to go into recession.

Australia: GDP growth contribution by sector

Housing Construction

The RBA is desperately trying to prevent a further fall in house prices because of the negative effect this will have on household spending (consumption). But rate cuts are not being passed on to borrowers, and households are maintaining their existing mortgage repayments (increasing savings) if they do benefit, rather than increasing spending.

House prices ticked up after the recent fall, in response to RBA interest rate cuts. But Martin North reports that the recovery is only evident in more affluent suburbs with lower mortgage exposure (e.g. Eastern suburbs in Sydney) and that newer suburbs and inner city high-density units are experiencing record levels of mortgage stress.

Housing

Building approvals reflect this, with a down-turn in detached housing and a sharp plunge in high density unit construction.
Building Approvals

Dwelling investment is likely to remain a drag on GDP growth over the next year.

Falling Commodity Prices

Iron ore and coal, Australia’s two largest commodity exports, are falling in price as the global economic growth slows. Dalian Commodity Exchange’s most-traded iron ore contract , with January 2020 expiry, closed at 616 yuan ($86.99) per tonne, close to a seven-month low. Falling prices are likely to inhibit further mining investment.

Iron Ore and Coal Prices

Metals & Mining

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

ASX 300 Metals & Mining

Financials

The Financial sector recovered this year, trending upwards since January, but faces a number of issues in the year ahead:

  • customer remediation flowing from issues exposed by the Royal Commission;
  • net interest margins squeezed as the RBA lowers interest rates;
  • continued pressure to increase capital ratios are also likely to impact on dividend payout ratios;
  • low housing (construction and sales) activity rates impact on fee income; and
  • high levels of mortgage stress impact on borrower default rates.

ASX 200 Financials index faces strong resistance at 6500. There is no sign of a reversal at present but keep a weather eye on primary support at 6000. We remain bearish in our outlook for the sector and breach of 6000 would warn of a primary decline with a target of 5200.

ASX 200 Financials

REITs are experiencing selling pressure despite an investment market desperate for yield. Dexus (DXS) may be partly responsible after the office and industrial fund reported a 26% profit fall in the first half of 2019.

ASX 200 REITs

ASX 200

The ASX 200 is showing signs of (secondary) selling pressure, with a tall shadow on this week’s candle and a lower peak on the Trend index. Expect a test of support at 6400; breach would offer a target of 5400.

ASX 200

We maintain exposure to Australian equities at 22% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

ASX hesitates in its downward slide

There is a hint of optimism in the air, with the year-on-year decline in housing prices slowing, to around -5% nationally, on the back of lower interest rates.

Housing

The ASX 200 hesitated in its downward slide but is still likely to test support at 6400. Breach would offer a target of 5400.

ASX 200

Iron ore continues to trade in a narrow range above short-term support at $90, suggesting continuation of the down-trend. Breach would offer a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index is testing 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 hesitated slightly, after a sharp fall last week. The rebound was undermined by an ANZ profit downgrade:

ANZ today announced its second half 2019 Cash Profit will be impacted by a charge of $559m (after-tax) as a result of increased provisions for customer related remediation.

Major banks’ net interest margins are also under increasing pressure as the RBA lowers interest rates.

Net Interest Margins

Expect ASX 200 Financials to test primary support at 6000. Breach would signal a primary decline, with a target of 5200.

ASX 200 Financials

REITs are surprisingly soft in a financial market desperate for yield. But there is wide disparity in the sector, with BWP for example surging, while office and industrial fund Dexus (DXS) is undergoing a sell-off.

ASX 200 REITs

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.

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.

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.

ASX 200 hanging despite bank rise

ASX 200 Financials broke through resistance at 5900/6000 while bullish divergence on Twiggs Money Flow signals buying pressure. The primary trend remains down but it appears that a base is forming. I remain wary of banks because of declining house prices but you can’t argue with the tape. A higher trough on the next correction would confirm a reversal.

ASX 200 Financials

The ASX 200 shows another hanging man candlestick at 6200 on the weekly chart, signaling hesitancy. The primary trend is down and the index is due for a correction soon. A higher trough would reverse the down-trend but there is a lot of uncertainty in global markets.

ASX 200

The Materials sector is retracing to test its new support level at 12500 after meeting resistance at 13000. The primary trend is upward and breach of 12500 is unlikely.

ASX 200 Materials

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200 buoyant but banks a worry

The Materials sector (18.5% of the ASX 200 index) continues its advance, buoyed by a temporary iron ore shortage and positive spin on US-China trade talks. The higher trough on Twiggs Money Flow below confirms buying pressure.

ASX 200 Materials

ASX 200 Financials (31.4% of the main index) are testing resistance at 5900/6000 but remain in a primary down-trend. Declining house prices are a significant headwind. Respect of resistance would strengthen the bear signal, while breakout would warn that a base is forming.

ASX 200 Financials

The ASX 200 is likely to test the 2018 high at 6350 but remains in a bear market. Another test of the former primary support level, at 5650, is likely. A higher trough, at that level, would reverse the down-trend.

ASX 200

I am cautious on Australian banks and hold more than 40% in cash and fixed interest investments in the Australian Growth portfolio.

ASX 200 enjoys iron ore spike

The ASX 200 has been buoyed by a temporary spike in iron ore prices. Materials (comprising 18.5% of the main index) broke through resistance at 12500, signaling a primary advance. A higher trough on Twiggs Money Flow indicates buying pressure.

ASX 200 Materials

The ASX 200 encountered resistance at 6100 but the rally could go so far as to test the 2018 high of 6350. We remain in a bear market. Only a correction that successfully forms a higher trough would reverse that. Expect another test of the former primary support level at 5650.

ASX 200

Financials, the largest ASX 200 sector (31.4%), remains in a primary down-trend. Declining house prices are likely to drag the index lower. Respect of resistance at 5900 would strengthen the bear signal, while breach of 5300 would signal another decline.

ASX 200 Financials

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