ASX double-bottom breakout

The ASX 200 completed a double-bottom reversal with breakout above 7100, suggesting another test of resistance at 7600. The signal is strengthened by subsequent retracement that respected the new support level at 7100, as well as 100-day Momentum crossover above zero.

ASX 200

Australian Bond ETFs are forming a base, signaling that expectations of long-term interest rates have plateaued.

Australian Bond ETFs

A-REITs rallied off support at 1200, penetrating the descending trendline which suggests that a base is forming. However, the move has not been confirmed by 100-day Momentum which remains well below zero.

ASX 200 REITs

Financials have made a stronger recovery, breaking above their August high, with Momentum crossing above zero. We expect a test of 7000.

ASX 200 Financials

Housing price growth is slowing as the RBA hikes interest rates.

Housing

But low unemployment keeps bank loan impairments down.

Unemployment

Net interest margins remain under pressure, however, as liquidity tightens.

Net Interest Margins

Consumer Discretionary continues to test resistance at 3000 but respect remains likely, which would warn of further consolidation.

ASX 200 Discretionary

Staples rallied off long-term support at 12000 but Momentum remains below zero. Breakout above resistance at 13000 would signal another test of 14000.

ASX 200 Staples

A higher trough on Health Care and 100-day Momentum cross to above zero are bullish signs. Breakout above 44K would signal another advance, with a target of 49K (44K + 44K – 39K).

ASX 200 Health Care

Information Technology remains weak, with 100-day Momentum deep below zero. Expect another test of 1250.

ASX 200 Information Technology

Utilities broke resistance at 8400, signaling an advance. Momentum crossover to above zero strengthens the bull signal..

ASX 200 Utilities

Industrials are headed for another test of resistance at 6700. But further ranging between 6000 and 6750 remains likely.

ASX 200 Industrials

Telecommunications are slowly edging towards resistance at 1500 but Momentum below zero indicates weakness.

ASX 200 Telecommunications

Energy remains in a long-term up-trend, testing resistance at 12000. Retracement that respects support at 11000 would strengthen the bull signal.

ASX 200 Energy

The ASX 300 Metals & Mining index broke resistance at 5650, signaling an up-trend. Retracement that respected the new support level and 100-day Momentum cross to above zero both strengthen the bull signal.

ASX 300 Metals & Mining

But weakness in major metal groups makes us wary. Declining iron ore prices are testing support at 90. Breach would signal a test of $50/tonne

Iron Ore

Base metals are similarly testing support at 150. Breach would warn of another test of 100.

DJ Industrial Metals Index

The All Ordinaries Gold Index broke through resistance at 5500, with retracement respecting the new support level to confirm the breakout. But 100-day Momentum is a long way below zero, warning buyers to be wary. Expect further tests of the new support level.

All Ordinaries Gold Index

The Australian Dollar is ranging between A$2500 and A$2700 with no clear direction at present.

Gold in Australian Dollars

Conclusion

Growth in Australia is slowing but recession is unlikely unless there is a sharp rise in unemployment — and fall in the housing market — or a global recession.

ASX 200 completed a double-bottom reversal, offering a target of 7600, but we do not believe this to be the start of a bull market. A negative yield curve in the US, warning of a recession next year, makes a bull market unlikely. Respect of resistance at 7600 would confirm that we are still in a bear market.

Our weighting for ASX sectors (ST = short-term, LT = long-term):

  • A-REITs: ST underweight, LT overweight in industrial REITs
  • Financials: overweight
  • Staples: overweight
  • Discretionary: ST underweight, LT neutral
  • Utilities: overweight
  • Industrials: neutral
  • Telecommunications: neutral
  • Health Care: overweight
  • Information Technology: underweight
  • Energy: overweight
  • Iron ore & Base Metals: ST underweight, LT neutral
  • Critical Materials: heavily overweight
  • Gold: ST neutral, LT overweight

ASX confirms a bear market

The ASX 200 broke primary support level at 7000, confirming a bear market.

ASX 200

Long-term interest rates are rising, with bond ETFs falling.

Australia: Bond ETFs

A-REITs respected resistance at the former primary support level of 1500, confirming the primary down-trend. Trend Index peaks below zero warn of strong selling pressure.

ASX 200 REITs

Financials fell dramatically last week, testing primary support at 6000, as the prospect of falling residential property prices and rising defaults looms. Higher interest rates and wider net interest margins should offset this to some extent. Expect retracement to test resistance at 6000. Follow-through below this level would confirm a primary down-trend and strengthen the overall bear market (Financials have been one of the stronger sectors).

ASX 200 Financials

Consumer Discretionary respected resistance at 3000, signaling another decline with a target of 2600 [3000-400]. Trend Index peaks below zero warn of strong selling pressure.

ASX 200 Consumer Discretionary

Consumer Staples broke support at 13K, with respect of the new resistance level warning of another test of 12K.

ASX 200 Consumer Staples

 

Utilities continue their primary up-trend, rising Trend Index troughs indicating strong buying pressure.

ASX 200 Utilities

Industrials are headed for another test of support at 6350. Breach would warn of another test of primary support at 6000.

ASX 200 Industrials

Telecommunications broke support at 1400, signaling a primary down-trend. Trend Index peaks below zero warn of strong selling pressure. Breach of support offers a target of 1200 [1400-200].

ASX 200 Telecommunications

Health Care is consolidating below 42.5K. Reversal below 40K would warn of another test of primary support at 37.5K. A Trend Index peak close to zero would warn of fading buyer interest.

ASX 200 Health Care

Information Technology continues in a primary down-trend, with Trend Index peaks below zero warning of selling pressure. Follow-through below 1400 would offer a target of 1100 [1500-400].

ASX 200 IT

The Energy sector is advancing strongly, while Trend Index troughs above zero signal buying pressure. The prospect of Chinese lockdowns easing is likely to boost demand for oil and gas, sending prices soaring.

ASX 200 Energy

Metals & Mining respected resistance at 6250, warning of another test of 5500. Declining Trend Index peaks suggest buyer interest is fading. Respect of support at 5500 would signal that the up-trend is intact but breach seems more likely and would offer a target of the November ’21 low at 4750.

ASX 300 Metals & Mining

The broad DJ Industrial Metals Index respected resistance at 200, while Trend Index peaks below zero warn of strong selling pressure. Easing of lockdowns in China may increase demand but a bear market remains likely.

DJ Industrial Metals Index

Iron ore is also undergoing a correction. Breach of support at 125 would warn of another test of primary support at 90.

Iron Ore

The All Ordinaries Gold Index is again testing support at 6000, while Trend Index below zero warns of selling pressure.

All Ordinaries Gold Index

The price of Gold in Australian Dollars, however, is trending upwards, with rising Trend Index troughs indicating increased interest from buyers. Expect a test of A$2800 per ounce. Breakout would offer a target of A$3400 [2800 + 600].

Gold in Australian Dollars

Conclusion

ASX 200 broke support at 7200, confirming a bear market. Rising long-term interest rates and a poor global economic outlook are expected to weaken most sectors, while easing of China’s lockdown restrictions should provide some relief to energy and metals.

Our weighting for ASX sectors is:

  • A-REITs: heavily underweight
  • Financials: neutral
  • Staples: neutral
  • Discretionary: heavily underweight
  • Utilities: overweight
  • Industrials: neutral
  • Telecommunications: underweight
  • Health Care: neutral
  • Information Technology: heavily underweight
  • Energy: heavily overweight
  • Iron ore & Base Metals: underweight
  • Critical Materials (e.g. Lithium and Rare Earth Elements): heavily overweight
  • Gold: overweight

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: Financials suffer, A-REITs advance on lower rates

The ASX 200 advance is tentative, with a short doji candle signaling hesitancy, and we expect retracement to test support at 7000.  The Trend Index trough above zero indicates longer-term buying pressure. Respect of support is likely and would signal a fresh advance.

ASX 200

Financial Markets

Bond ETFs broke through resistance, signaling falling long-term interest rates.

Australian Bond ETFs

A-REITs advanced on the prospect of lower long-term interest rates.

ASX 200 Property

Bank net interest margins, however, are squeezed when interest rates fall.

Bank Net Interest Margins

ASX 200 Financials retreated to test support at 6500. The trend is unaffected and Trend Index troughs above zero indicate long-term buying pressure.

ASX 200 Financials

Mining

Mining continues to benefit from the infrastructure boom, with iron ore respecting support at $200/ton1. Troughs above zero, flag buying pressure, and respect of support both signal another advance.

Iron Ore

The ASX 300 Metals & Mining index is again testing resistance at 6000. Breakout would signal another advance, with a target of 65002.

ASX 300 Metals & Mining

Health Care & Technology

Health Care respected its new support level and is advancing strongly. Expect resistance between 45000 and 46000.

ASX 200 Health Care

Information Technology recovered above former resistance at 2000, warning of a bear trap. Expect resistance at 2250; breakout would signal a new advance.

ASX 200 Information Technology
Gold

The All Ordinaries Gold Index (XGD) is testing resistance at 7500. Breakout would signal a fresh advance, with a target of 9000.

All Ordinaries Gold Index

The Gold price is retracing to test the new support level at A$2400 per ounce. Respect of support is likely and breakout above A$2500 would be a strong bull signal for Aussie gold miners.

Gold in AUD

Conclusion

We expect A-REITs and Bond ETFs to advance on the back of lower long-term interest rates.

Financials are expected to undergo a correction as interest margins are squeezed.

Metals & Mining are in a strong up-trend because of record iron ore prices.

Health Care is recovering well and expected to test resistance.

Technology had a strong week but the outlook is still uncertain.

We expect the ASX 200 to retrace to test support at 7000 as its largest sector (Financials) undergoes a correction.

Notes

  1. Tons are metric tons unless otherwise stated.
  2. Target for Metals & Mining is calculated as support at 5000 extended above resistance at 5750.

ASX Technology stocks fall

The ASX 200 continues to test its February 2020 high at 7200. Narrow consolidation below resistance is a bullish sign but we need to keep a weather eye on the US and China.

ASX 200

Financial Markets

Bond ETFs, in a sideways consolidation, indicate that long-term interest rates are holding steady. Inflation remains muted and the RBA is following through on their stated intention to suppress long-term yields.

Australian Bond ETFs

A-REITs are testing resistance at 1500. Reversal below 1340 is unlikely but would warn of a double-top reversal.

ASX 200 REITs

Financials are testing resistance at 6500. A rising 13-week Trend Index — with troughs above zero — flags buying pressure, suggesting that a breakout is likely.

ASX 200 Financials

Health Care, Discretionary & Technology

Health Care is testing resistance at 42500. The rising Trend Index is bullish but failure to cross above zero would confirm long-term selling pressure. Breach of 40000 would complete a bull-trap (a bear signal for investors) and warn of another test of primary support at 37500.

ASX 200 Health Care

Technology broke support at 1900 to signal a primary down-trend, imitating the pattern in US markets. Breach offers a medium-term target of 14001.

ASX 200 IT

Consumer Discretionary is testing its rising trendline. We expect a test of support at 2900 as the impact of government stimulus fades.

ASX 200 Discretionary

Mining

Iron ore retreated slightly, to $210/metric ton. Chinese steel mills are stockpiling — due to rising tensions with Australia and anticipated production curbs in China (to reduce pollution levels). The boom is only expected to last as long as stockpiling continues. Then prices are likely to fall steeply as mills run down stockpiles. Reversal below support at $175-$180 would warn of a sharp decline.

Iron Ore

The ASX 300 Metals & Mining found resistance at 6000. A tall shadow on this week’s candle warns of short-term selling pressure. Another test of support at 5000 is likely.

ASX 300 Metals & Mining

The All Ordinaries Gold Index (XGD) continues to test its new support level at 7000. Follow-through below recent lows would warn of another test of 6000, while recovery above 7300 would signal a fresh advance. Breakout above the long-term descending trendline would strengthen the bull signal. Gold bullishness is fueled by rising inflation fears.

All Ordinaries Gold Index

The Gold price, in Australian Dollars, is testing its descending trendline and resistance at 2400. Breakout above the two would deliver a strong bull signal.

Gold in AUD

Conclusion

Technology stocks have commenced a primary down-trend. Metals & Mining look highly-priced and susceptible to a sharp reversal. They have looked that way for months but sooner or later we are bound to see a rapid re-pricing.

Steady long-term interest rates and a buoyant housing market are lifting REITs and Financials respectively. Health Care and Consumer Discretionary look hesitant, while Gold stocks are making a tentative rally.

Notes

  1. Target for XIJ is its 2400 peak extended below 1900.

Markets that are likely to outperform in 2021

There is no reliable benchmark for assessing performance of different markets (stocks, bonds, precious metals, commodities, etc.) since central banks have flooded financial markets with more than $8 trillion in freshly printed currency since the start of 2020. The chart below from Ed Yardeni shows total assets of the five major central banks (Fed, ECB, BOC, BOE and BOJ) expanded to $27.9T at the end of November 2020, from below $20T at the start of the year.

Central Banks: Total Assets

With no convenient benchmark, the best way to measure performance is using relative strength between two prices/indices.

Measured in Gold (rather than Dollars) the S&P 500 iShares ETF (IVV) has underperformed since mid-2019. Respect of the red descending trendline would confirm further weakness ahead (or outperformance for Gold).

S&P 500 iShares ETF/Gold

But if we take a broad basket of commodities, stocks are still outperforming. Reversal of the current up-trend would signal that he global economy is recovering, with rising demand for commodities as manufacturing output increases. Breach of the latest, sharply rising trendline would warn of a correction to the long-term rising trendline and, most likely, even further.

S&P 500 iShares ETF/DJ-UBS Commodity Index

Commodities

There are pockets of rising prices in commodities but the broader indices remain weak.

Copper shows signs of a recovery. Breakout above -0.5 would signal outperformance relative to Gold.

Copper/Gold

Brent crude shows a similar rally. Breakout above the declining red trendline would suggest outperformance ahead.

Brent Crude/Gold

But the broad basket of commodities measured by the DJ-UBS Commodity Index is still in a down-trend.

DJ-UBS Commodity Index/Gold

Precious Metals

Silver broke out of its downward trend channel relative to Gold. Completion of the recent pullback (at zero) confirms the breakout and signals future outperformance.

Silver/Gold

Stock Markets

Comparing major stock indices, the S&P 500 has outperformed the DJ Stoxx Euro 600 since 2010. Lately the up-trend has accelerated and breach of the latest rising trendline would warn of reversion to at least the long-term trendline. More likely even further.

S&P 500 iShares ETF/Euro Stoxx 600

The S&P 500 shows a similar accelerating up-trend relative to the ASX 200. Breach of the latest trendline would similarly signal reversion to the LT trendline and most likely further.

S&P 500 iShares ETF/ASX 200

Reversion is already under way with India’s Nifty 50 (NSX), now outperforming the S&P 500.

S&P 500 iShares ETF/Nifty 50

S&P 500 performance relative to the Shanghai Composite plateaued at around +0.4. Breakout would signal further gains but respect of resistance is as likely.

S&P 500 iShares ETF/Shanghai Composite

Growth/Value

Looking within the Russell 1000 large caps index, Growth stocks (IWF) have clearly outperformed Value (IWD) since 2006. Breach of the latest, incredibly steep trendline, however, warns of reversion to the mean. We are likely to see Value outperform Growth in 2021.

Russell 1000 Value/Growth

Bonds

The S&P 500 has made strong gains against Treasury bonds since March (iShares 20+ Year Treasury Bond ETF [TLT]) but is expected to run into resistance between 1.3 and 1.4. Rising inflation fears, however, may lower bond prices, spurring further outperformance by stocks.

S&P 500 iShares ETF/Long_term Bond ETF (TLT)

Currencies

The US Dollar is weakening against a basket of major currencies. Euro breakout above resistance at $1.25 would signal a long-term up-trend.

Euro/Dollar

China’s Yuan has already broken resistance at 14.6 US cents, signaling a long-term up-trend.

Yuan/Dollar

India’s Rupee remains sluggish.

Indian Rupee/Dollar

But the Australian Dollar is surging. The recent correction that respected support at 70 US cents suggests an advance to at least 80 cents.

Australian Dollar/Dollar

Gold, surprisingly, retraced over the last few months despite the weakening US Dollar. But respect of support at $1800/ounce would signal another primary advance.

Spot Gold/Dollar

Conclusion

Silver is expected to outperform Gold.
Gold is expected to outperform stocks.
Value stocks are expected to outperform Growth.
India’s Nifty 50 is expected to outperform other major indices. This is likely to be followed by the Stoxx Euro 600 and ASX 200 but only if they break their latest, sharply rising trendlines. That leaves the S&P 500 and Shanghai Composite filling the minor placings.
Copper and Crude show signs of a recovery but the broad basket of currencies is expected to underperform stocks and precious metals.
The Greenback is expected to weaken against most major currencies, while rising inflation is likely to leave bond investors holding the wooden spoon.

ASX catches a virus

It’s not a pretty sight. The ASX 200 fell close to 10% in a single week. The severity of the fall suggests that sellers are committed and buyers are scarce. Breach of support at 6400 is highly likely and would offer a target of 5400 (a 25% draw-down).

ASX 200

A V-shaped recovery is unlikely.

The ASX 300 Metals & Mining index broke primary support at 4100, completing a double-top reversal with a target of 3400.

ASX 300 Metals & Mining

The Aussie Dollar is also getting smashed, headed for a target of 64 cents after breaking support at 67.

AUDUSD

The ASX 300 Banks index is headed for a test of 7250/7300. Breach is likely and would offer a test of 6750.

ASX 300 Banks

Our conclusion hasn’t changed from last week:

Threats continue to outweigh opportunities in our view and we retain a bearish view on the global and domestic economies. Our focus remains on defensive and contra-cyclical (gold) stocks.

ASX 200 retracement likely

A short candle with a tall shadow on the ASX 200 weekly chart warns of short-term selling pressure. Expect retracement to test the new support level at 6800.

ASX 200

Weakness has been driven by the Resources sector, with a gravestone candle on the ASX 300 Metals & Mining index warning of selling pressure at resistance at 4800 and a likely reversal to test support at 4450.

ASX 300 Metals & Mining

A short candle on the ASX 300 Banks index warns of increased short-term selling pressure. Respect of the descending trendline would signal another decline; breach of support at 7250 would confirm. Penetration of the trendline is less likely but would suggest that a bottom is forming.

ASX 300 Banks

We continue to hold a bearish view on the domestic economy but recognize that the temporary tailwind from resources (iron ore) may partly alleviate this. IT and Healthcare sectors are, in our view, over-priced and we maintain our focus on defensive and contra-cyclical (gold) stocks.

ASX 200 lifted by resources

The ASX 200 is advancing towards its medium-term target of 7200 after breaking resistance at 6800. A high trend index trough signals buying pressure.

ASX 200

Primary driver of the advance is Resources. Signing of phase one of the US-China trade deal lifted iron ore, which is  testing resistance at 95. Consolidation at/below 95 is likely, however, given that the mid-2019 peak was caused by supply disruption in Brazil.

Iron Ore

The ASX 300 Metals & Mining index is headed for a test of resistance at 4800.

ASX 300 Metals & Mining

Financials are weak, but the ASX 300 Banks index found support at 7250. Respect of the descending trendline would warn of another decline, with a short-term target of 7000. Penetration of the trendline is less likely but would warn that a bottom is forming.

ASX 300 Banks

The ASX 200 REITs index is testing resistance at 1680, reflecting the investor demand for yield.

ASX 200 REITs

A weakening Australian Dollar may lift exports slightly but reflects concerns over the phase one US-China trade deal and the impact substantive purchase commitments made by China will have on other energy and commodity suppliers. Breach of 68.50 would offer a short-term target of 67 US cents.

AUDUSD

We continue to hold a bearish view on the domestic economy but recognize that the tailwind from resources may partly alleviate this. IT and Healthcare sectors are, in our view, over-priced and we maintain our focus on defensive and contra-cyclical (gold) stocks.

ASX Leading Sectors

The ASX 200 broke resistance at 6800, signaling a fresh advance. Expect retracement to test the new support level. Respect would strengthen the bull signal, confirming a fresh advance.

ASX 200 Quarterly

At the same time, fundamentals are distinctly bearish, with falling retail sales and dwindling GDP growth. So, what sectors are driving the index?

A comparison of the ASX 200 sector indices shows that the advance is led by Healthcare and Information Technology sectors, while the laggards are Financials, Utilities and Telecommunications.

ASX Sector Comparison

Top performers in Healthcare (with forward price-earnings ratio where available) are:

  • Polynovo (PNV) – negative eps
  • Clinuvel (CUV) – 79
  • Pro Medicus (PME) – 137
  • Nanosonics (NAN) – 158
  • Resmed (RMD) – 55
  • CSL (CSL) – 49
  • Fisher & Paykel Health (FPH) – 55

ASX 200 Healthcare Top Performers

In Information Technology, top performers are:

  • Afterpay (APT) – negative eps (forward pe 476)
  • Nearmap (NEA) – negative eps
  • Bravura (BVS) – 37
  • Appen (APX) – 58
  • Xero (XRO) – 5998 (forward pe 270)
  • Altium (ALU) – 63

ASX 200 Information Technology Top Performers

The graph below compares PE Ratios on the y-axis to required Annual Growth in earnings on the x-axis. The curve plots the compound annual growth (CAGR) required for a 20-year income stream to deliver a 12.5% return on investment.

PE Ratio compared to Expected Growth

What this illustrates is that PE Ratios above 50 should be treated with caution as they assume the ability to maintain high CAGR in earnings (e.g. above 20%) for long periods. Even when growing off a low base that can be difficult to achieve.

Bottom line: many stocks in these sectors (Healthcare and IT) are highly-priced and vulnerable to strong draw-downs.