Australian banks rally

The ASX 200 is headed for another test of resistance at 5600. Bearish divergence on Twiggs Money Flow warns of selling pressure. Breakout above 5600 is unlikely and breach of the lower trend channel would warn of a test of primary support at 5000/5100.

ASX 200

* Target calculation: 5400 + ( 5400 – 5100 ) = 5700

The ASX 300 Banks Index formed a bullish higher trough above 7200 and is again testing resistance at 8000. Declining Twiggs Money Flow, however, warns of selling pressure. Respect of resistance remains likely. Breakout, however, would signal a primary up-trend.

ASX 300 Banks Index

Flattening yield curve & low bank interest margins

The Yield Differential, calculated by subtracting 3-month from 10-year Treasury Yields, is trending lower. This warns that the yield curve is flattening but we are still above the danger area below 1.0 percent.

Yield Differential: 10-Year minus 3-Month Yields

A flat yield curve squeezes bank interest margins and often precedes a credit contraction.

Large US Banks: Net Interest Margins

But there is little sign of slowing credit growth so far.

US Bank Loans & Leases: Annual Growth

The St Louis Fed Financial Stress Index (STLFSI) continues to indicate low market stress.

St Louis Fed Financial Stress Index

The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.

Dow selling pressure

The S&P 500 is retracing for a test of short-term support at 2150. Respect of the rising trendline would signal a test of 2200. Breakout above 2200 would complete an inverted scallop (or fish hook) with a target of 2400*. Declining Twiggs Money Flow, however, warns of selling pressure. Breach of 2050 would test medium-term support at 2100.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 1800 ) = 2400

The Dow Jones Industrial Average also displays a potential inverted scallop on the weekly chart. Follow-through above 18600 would confirm but bearish divergence on Twiggs Money Flow again warns of selling pressure. Tall shadows on the last two candles also suggest short-term selling pressure. Breach of support at 18000 would warn of a test of primary support at 17000.

Dow Jones Industrial Average

* Target medium-term: 18500 + ( 18500 – 18000 ) = 19000

More inverted scallops

Dow Jones Global Index respected the new support level at 316/320, confirming another advance. Follow-through above 325 would complete an inverted scallop (or inverted fish hook) with a target of 345*. Momentum troughs above zero flag trend strength.

DJ Global Index

* Target calculation: 315 + ( 325 – 295 ) = 345.
Note this is more conservative than Thomas Bulkowski’s target which is calculated 325 + ( 325 – 295 ) = 355

India: Sensex spinning tops

India’s Sensex is consolidating below medium-term resistance at 29000. Spinning tops and dojis signal indecision. Breakout above 29000 is likely and would test the 2015 highs at 30000. Expect strong resistance at 30000. Penetration of the lower trend channel would warn of a correction.

SENSEX

Gold respects support

10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.

Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.

UK: Footsie rallies

The Footsie rebounded after a short retracement — a bullish sign. Expect strong resistance at 7000/7100 but completion of another trough on Twiggs Money Flow, high above zero, would signal strong buying pressure.

FTSE 100

* Target calculation: 6500 + ( 6500 – 5900 ) = 7100

DAX bear trap

Germany’s DAX recovered above the former support level of 10500, confirming the primary up-trend. A Twiggs Money Flow trough above zero would signal long-term buying pressure. Follow-through above 10800 would complete a bear trap — a bullish signal with a target of 11500*.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Michelle Obama and Stephen Colbert

Why are first wives more likable than their husbands?

TPG shares drop more than 20 per cent on disappointing forecast

From Lucy Battersby:

The market has fallen out of love with telco company TPG….

The cut-price telco beat guidance by just $300,000 when it has a history of beating guidance by tens of millions of dollars.

It has also forecast earnings growth of 7 per cent this year, the lowest growth forecast in seven years.The reasons for the soft result include plans for more capital expenditure than usual, its future profit margins are likely to be squeezed on the NBN, and there are few obvious acquisitions left after swallowing up iiNet and AAPT in recent years…..

Source: TPG shares drop more than 20 per cent on disappointing forecast

Warning sign of China bank crisis | Business Insider

From Engen Tham, Reuters:

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, a report from the Bank for International Settlements says.

The credit-to-gross-domestic-product gap, an early warning of financial overheating, hit 30.1 in China in the first quarter of this year, the financial watchdog said in a review of international banking and financial markets published Sunday.

Any level above 10 signals a crisis “occurs in any of the three years ahead,” the BIS said. China’s indicator is way above the second-highest level of 12.1 for Canada and the highest of the countries assessed by the BIS….

From the BIS:

The credit-to-GDP gap captures the build-up of excessive credit in a reduced-form fashion. It is defined as the difference between the credit-to-GDP ratio and its long-run trend, and it has been found to be a useful early warning indicator of financial crises.

In the BIS Table of credit-to-GDP gaps, Hong Kong was second highest at 18.1. Chile (15.7), Singapore (14.8), Thailand (14.5), Saudi Arabia (14.0) and Belgium (12.2) are higher than Canada (12.1). Australia (4.5), USA (-9.9) and UK (-27.0) are far lower. In fact, UK looks like a credit contraction.

Source: Credit-to-GDP warning sign of bank crisis China – Business Insider

Bob Doll: Equities Appear More Attractive than Other Asset Classes | Nuveen

From Bob Doll’s weekly newsletter:

The strong patch of summer U.S. economic data may have ended. Following weak Institute for Supply Management readings in previous weeks, August retail sales declined 0.3%. This marks the first pullback since March, and bears watching for a broader downtrend into September…..

Corporate earnings expectations are climbing slowly. Following a modest second quarter improvement, analyst expectations for future quarters have climbed in recent weeks…..

Equities may continue to climb in 2016, based on historical trends. Strategy group Fundstrat shows that since 1940, when stock prices increased more than 5% by mid-September, 87% of the time they rallied further in the last three-and-a-half months of the year. As of Friday’s close on September 16, the S&P 500 Index is up 6.3%….

As you can see from Bob’s commentary, there seems to be a divergence between economic data (retail sales in this case) and technicals which tend to be more focused on the earnings expectations. I have seen something similar.

Retail sales have fallen in July/August but of greater concern is the longer-term down-trend. Continued growth below core CPI would warn of a contraction in real terms.

Retail Sales ex Motor Vehicles & Parts

Light Vehicle Sales are also below trend, reinforcing the down-turn in consumer outlook.

Light Vehicle Sales

The decline in sales is reinforced by the decline in growth of average weekly earnings (all employees).

Weekly Earnings - All Employees

Technicals, on the other hand, remain reasonably strong for the present. Until declining sales impact on corporate earnings.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.

Austrian psychiatrist and neurologist Viktor Frankl spent three years in Theresienstadt, Auschwitz and later Dachau concentration camps (1942 – 1945). His mother and his brother Walter died at Auschwitz. His wife was moved to Bergen-Belsen, where she died. The only other survivor among his immediate family was his sister, Stella, who had emigrated to Australia. He published Man’s Search for Meaning in 1946.

Frankl concludes that the meaning of life is in every moment of living. Life never ceases to have meaning, even in suffering and death. He observed that a prisoner’s psychological reactions are not simply the result of his treatment, but from how he chooses to respond. The hold that a prisoner has on his inner self requires having hope in the future; if he loses that hope, he is doomed.

Viktor Frankl: The power to choose your response

Give me six hours to chop down a tree and I will spend the first four sharpening the axe.

Abraham Lincoln: Sharpen the axe

Opportunities in Australian banks | Franklin Templeton

Alastair Hunter – Lead Analyst, Investment Manager | Franklin Local Asset Management

The US Election and Global Political Landscape | Franklin Templeton

Ganggajang: Sounds Of Then

More Australiana: Sounds Of Then (This is Australia) by Ganggajang

Niall Ferguson: The “age of debt” has come to an end

Apologies for the sub-titles but this Hard Talk interview has an important message.