ASX: Miners versus Banks

The struggle between miners and banks continues.

The ASX 300 Metals & Mining index is rallying strongly. Breakout above 3600 and the descending trendline suggests that the correction is over and a new advance is underway.

ASX 300 Banks

But the financial sector is being hammered by bad press from the Royal Commission and the ASX 300 Banks index is likely to test the 2016 low at 7100. Trend Index peaks below zero warn of strong selling pressure.

ASX 300 Banks

The ASX 200 index recovered above primary support level at 5800 but bearish divergence on Twiggs Money Flow continues to warn of long-term selling pressure. Retreat below 5800 is likely and would confirm the primary down-trend. Breach of mid-2017 lows at 5650 would strengthen the bear signal, offering a target of 5050 (the June and November 2016 lows).

ASX 200

Rising crude bullish for Gold

Rising Crude prices continue to weaken the Dollar.

Dollar Index

The Dollar Index is consolidating between 89 and 91. Bullish divergence on the Trend Index suggests solid support but continued rise in crude prices or threat of a trade war could undermine this.

Dollar Index

Gold has been testing resistance at $1350/$1360 per ounce over the last 3 months, catching bulls several times with a false break followed by a hasty retreat. But follow-through above $1360 would indicate commitment from buyers. And retracement that respects a new support level at $1350 would confirm the breakout, signaling another primary advance. A weaker Dollar would fuel demand for Gold.

Spot Gold

There are two wild cards that could cause an upward spike in gold: a trade war with China and rising geo-political tensions. The former would weaken the Dollar if Chinese purchases of foreign reserves are scaled back, while the latter would directly increase safe-haven demand for gold.

S&P 500 volatility

The S&P 500 again respected primary support at 2550. Twiggs Volatility Index is retreating but a trough that forms above 1.0% would warn that market risk remains elevated.

S&P 500

ASX 200: Miners versus Banks

Direction of the ASX 200 is generally dictated by the two largest sectors: banks and miners.

The ASX 300 Metals & Mining index rallied off its long-term rising trendline this week. Breakout above 3600 would signal that the correction is over and a new advance is to be expected.

ASX 300 Banks

But the big four banks dominate index weightings and the ASX 300 Banks index respected resistance at 8000, confirming a primary decline. Trend Index peaks below zero warn of strong selling pressure. Target for the decline is the 2016 low at 7100.

ASX 300 Banks

The ASX 200 index recovered above primary support level at 5800 but its hold looks precarious. Bearish divergence on Twiggs Money Flow warns of long-term selling pressure (the Trend Index is even more bearish). Retreat below 5800 is likely and would confirm the primary down-trend. Breach of mid-2017 lows at 5650 would strengthen the bear signal, offering a target of 5050 (the June and November 2016 lows).

ASX 200

Gold, Crude, the Dollar and Donald Trump

Since the 1970s, gold and crude oil have tended to rise and fall together as illustrated by the chart below, with gold and crude prices adjusted for inflation.

Spot Gold and WTI Light Crude

The reason is not hard to find. When crude prices rise the Dollar weakens. The chart below compares crude, adjusted for inflation, against an inverted Dollar Index. Major rises in crude are normally accompanied by a similar rise in the inverted Dollar index (signaling Dollar weakness).

WTI Light Crude and inverted Dollar Index

However, the converse is not always true. The 1986 Plaza Accord — where Japan and Germany agreed to scale back Dollar purchases — caused a sharp fall in the Dollar without a corresponding rise in crude.

If Donald Trump successfully negotiates a new trade deal with China, cessation of Chinese purchases could spark a similar decline of the Dollar.

Dollar Index

The Dollar Index is currently consolidating between 88.50 and 91. I suggested last week that it may be forming a base. But rising Crude prices add downward pressure on the Dollar.

Dollar Index

And Gold is the likely beneficiary.

Spot Gold

Breakout above $1375/ounce would signal a strong advance.

We can’t blame Donald Trump for the rise in geo-political tensions around the world. Those are more a legacy of the previous administration’s failure to enforce red lines. But Trump’s communication style does tend to inflame issues and rising geo-political tensions in Syria, North Korea, South China Sea, Ukraine, the Balkans and Baltic states — to name but a few — are also likely to fuel demand for gold as a safe haven.

S&P 500 and Volatility

After a brief flicker of fear, when volatility spiked above 30, the VIX is hovering around 20 suggesting uncertainty. The market is undecided whether to take this Twitter War seriously.

CBOE Volatility Index (VIX)

The S&P 500 is again testing primary support around 2550 but Twiggs Money Flow remains comfortably above zero, indicating long-term buying support.

S&P 500

Twiggs Volatility (21-day) is still in the amber zone, between 1% and 2%. A rise above 2% remains unlikely but another trough above 1% is my primary concern and would convince me to reduce equity exposure to 50% (of portfolio value).

S&P 500

J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to your sleeping point.” ~ Burton Malkiel

Banks lead ASX 200 lower

The ASX 300 Banks index is retracing to test the primary support level at 8000 breached 3 weeks ago. Trend Index peaks below zero warn of selling pressure. Respect of resistance at 8000 is likely and would warn of a primary decline to the 2016 low at 7100.

ASX 300 Banks

The Royal Commission on banking is having a two-fold effect on the market. First, airing of banks’ dirty laundry in public has increased investor concerns, leading to a sell-off in banking stocks. But the second effect may be more significant. Banks are expected to tighten lending standards as a result of the commission, which will slow credit growth. Slower credit growth would result in falling house prices as new buyers struggle to obtain finance, except at lower LVRs and higher interest rates. Falling house prices in turn would encourage banks to further tighten lending standards. Slower lending growth and higher default rates would both impact on bank earnings….. and stock prices.

Adding to ASX misery, the Resources sector is undergoing a correction, now in its third month, with the ASX 300 Metals & Mining index heading for a test of support at 3250.

ASX 300 Banks

The ASX 200 index is retracing to test its former primary support level at 5800. Bearish divergence on Twiggs Money Flow warns of selling pressure. Respect of resistance is likely and would confirm a primary down-trend. Breach of the mid-2017 lows at 5650 would strengthen the bear signal, offering a target of the June and November 2016 lows at 5050.

ASX 200

Gold and the trade war

The Dollar Index continues to consolidate between 88.50 and 91. Despite talk of a trade war with China, a rising Trend Index warns of growing support. Breakout above 91 would indicate that the primary down-trend is weakening. Breach of support at 88.50 is less likely but would signal another decline.

Dollar Index

A rising Dollar would weaken demand for Gold. Breach of support at $1300/ounce would warn of another test of primary support at $1250. But breakout above $1350 remains as likely and would signal another primary advance.

Spot Gold

A lot will depend on performance of the Dollar as the threat of trade tariffs escalates.

ASX slipping over the edge

The ASX 300 Banks index followed through after breaching primary support (at 8000) last week. Bearish divergence on the Trend Index confirms strong selling pressure. Expect a primary decline to target the 2016 low at 7100.

ASX 300 Banks

The ASX 200 index slipped below primary support at 5800 this morning, warning of a primary down-trend. A close below 5800 this afternoon would strengthen the signal. Bearish divergence on Twiggs Trend Index signals selling pressure. Expect a test of the June to September low at 5650. Breach of 5650 would confirm a primary decline and target the June and November 2016 lows at 5050.

ASX 200

Productivity Commission takes a swipe at banking regulators

From Clancy Yeates at The Age:

The Productivity Commission last month took aim at speed limits imposed on lending to property investors in 2014, and 2017 caps on interest-only lending, saying the policies were a “blunt intervention with detrimental effects on market competition”.

The commission’s draft report on competition in finance said regulators were putting too much emphasis on stability, and argued the watchdog’s loan caps had boosted big bank profits while making it harder for smaller banks to compete….

Bank regulators are “putting too much emphasis on stability” ??

I thought April 1st was next week.

The challenge facing the West

Here is an excerpt from my recent post on Trump’s Trade War:

Why has it taken this long to respond?

The last incumbent in the White House refused to confront the rising menace. A risk-averse culture led to micro-management and Obama’s mantra of “Don’t do stupid sh*t” frequently translated into “Don’t do anything”.

On Obama’s watch the US abdicated its global leadership, leaving the door open for charlatans like Vladimir Putin and Xi Jinping to step into the void. His legacy is a series of brewing crises that risk a major global confrontation in the next few decades. Taiwan and the South China Sea, India and Pakistan, North Korea, Iran and Saudi Arabia, Yemen, Syria, Ukraine, the Balkans, and the Baltic States. All of these hotspots have the potential to spark a major conflict. It needs just a single miscalculation from an emboldened aggressor accustomed to being able to bully their neighbors into acquiescence.

All this seems eerily familiar. As Winston Churchill long ago warned: “An appeaser is one who feeds a crocodile, hoping it will eat him last.”

Bold leadership is required in the West. Unfortunately Trump is not up to the task.

Donald Trump

His style is too divisive to ever unite the country or Western allies against the common threat.

I later revised my description of Xi and Putin from charlatans to scoundrels after receiving this note from Alan Hartley:

Colin, you refer to “leaving the door open for charlatans like Vladimir Putin and Xi Jinping to step into the void”

Macquarie Ed.5 :”charlatan – someone who pretends to more knowledge or skill than they possess”

The reference to “charlatan” reflects an ill-informed Western view of world leadership. Rather, I suggest both men possess far more knowledge and skill than blinkered Western eyes have been able to discern.

Beware under-estimating leadership that has driven the rise of China and growing power of Russia. The tactics may not please Western pedantics, but those same people cannot be too at ease either with Donald Trump’s dragon diet approach – eats roots shoots and leaves.

I agree that we should not underestimate the threat that the two pose to Western democracy. Both have proved adept at exploiting weaknesses in our system. Their absence of principles and lack of respect for the rights of others make them a serious threat. The situation is exacerbated by weak leadership in the West.

Vladimir Putin

Putin in particular is highly skilled at exploiting weakness and creating chaos to keep his opponents off-balance. Like Erwin Rommel’s campaign in North Africa, a smaller opponent can outmaneuver larger, more ponderous forces through confusing and erratic behavior. But they are unlikely to prevail in the long-term over a patient, methodical opponent who slowly but relentlessly restricts their ability to maneuver, like Montgomery did at El Alamein1.

Xi Jinping

For that reason, Xi Jinping is a far more formidable opponent. The Chinese approach is more like Montgomery or Sun Tzu: slow, patient and methodical. While the US are masters at shock and awe, I question if they have the patience to play the long game. This is a struggle between two competing ideologies that may take generations to resolve.

Notes

  1. Hat tip to Tim Harford: Chaos has its limits even in Donald Trump’s White House

East to West: Trade tariff fears

Plenty of red ink as Trump’s threat of trade tariffs spooked global markets, with fears of a global trade war.

China’s Shanghai Composite Index is headed for a test of primary support between 3000 and 3060 with a falling Trend Index warning of strong selling pressure.

Shanghai Composite Index

South Korean investors are more spooked by Trump’s trade tariffs than Kim Jong-un’s nukes. The Seoul Composite Index retreated below support at 2450, while bearish divergence on the Trend Index warns of strong selling pressure. Breach of 2350 would signal a primary down-trend. Breach of 2300 would confirm.

Seoul Composite Index

Japan’s Nikkei 225 Index is falling hard. Breach of support at 21000 offers a target of the September 2017 low at 19250.

Nikkei 225 Index

India’s NSE Nifty Index is testing primary support at 10000.

Nifty Index

Europe is in the same basket, with Dow Jones Euro Stoxx 600 testing primary support at 365.

DJ Euro Stoxx 600

The Footsie broke primary support at 7100 to signal a primary down-trend.

FTSE 100

In the US, the Nasdaq 100 is likely to test primary support at 6200 but this looks like a secondary correction, with the Trend Index still positive.

Nasdaq 100

The S&P 500 is similarly headed for a test of primary support between 2500 and 2550. Breach would signal a primary down-trend but Twiggs Volatility Index is currently in the amber zone, between 1% and 2%, suggesting that the correction is secondary in nature. For more on the Volatility Index, see Market Volatility and the S&P 500.

S&P 500

Canada’s TSX 60 also signals strong selling pressure. Breach of 880 would signal a primary down-trend.

TSX 60

As the market flees from risk, two of the traditional safe havens — the Dollar and the Japanese Yen — are under threat from a trade war. Which leaves Gold as the last man standing.

Crunch time for the ASX

The ASX 300 Banks index breached primary support at 8000, signaling renewal of the primary down-trend. Bearish divergence on the Trend Index has been warning of strong selling pressure for some months, reinforced by the Trend Index holding below zero for almost a year. A primary decline is expected to target the 2016 low at 7100.

ASX 300 Banks

Decline of its largest sector is likely to weigh heavily on the ASX 200 index. Bearish divergence on Twiggs Trend Index warns of selling pressure. Breach of primary support at 5800 is likely and would present a short-term target at 5650. Follow-through below 5650 would confirm a primary decline and a target of the June and November 2016 lows at 5050.

ASX 200

Gold stirs as Dollar falls

The Dollar Index is retreating from resistance despite another rate hike from the Fed. Follow-through below 89.50 would signal another test of primary support at 88.50. Respect of resistance suggests another decline; confirmed if primary support is broken.

Dollar Index

Gold is stirring as the Dollar weakens. Penetration of the descending trendline suggests that the correction is over. Follow-through above $1340 per ounce would test resistance at $1360.

Spot Gold

Breach of primary support by the Dollar would most likely fuel another primary advance for gold.

Australia: Contraction ahead

Concern about rising household debt and house prices prompted Australian regulators to crack down on bank lending, with APRA introducing limits on interest-only loans.

Australia: Household Debt and Housing Prices

China is also making it more difficult for Chinese nationals to purchase real estate offshore. The combined result is a slow-down in Australian bank credit, with credit and broad money growth falling below 5% for the first time since the global financial crisis.

Australia: Credit and Broad Money Growth

Currency in circulation may be more volatile but a sharp fall in currency growth over the last two years confirms tighter monetary conditions.

Australia: Currency and M3 Growth

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recently kicked off with intense media coverage. Airing of banks’ dirty laundry in public is again likely to lead banks to further tighten lending standards. Falling housing prices as a result of fewer offshore purchases and restrictive lending practices will in turn fuel a more negative lending outlook, creating a negative feedback loop.

While a credit contraction can still be avoided, it may be difficult for the RBA and APRA to reverse course. Given that their objective is to avoid a full-blown banking crisis, caused by a collapse of the housing bubble, the current slow-down may appeal as the lesser of two evils.

ASX 200 meets stubborn resistance

A long-term, monthly chart filters out most short-term market ‘noise’. The ASX 200 has found stubborn resistance at 6000, while bearish divergence on the Trend Index warns of selling pressure. Follow-through below 5900 would warn of a test of primary support at 5600/5650. A primary down-turn on ASX banks would strengthen the bear signal.

ASX 200

The ASX 300 Metals & Mining index continues in a primary up-trend. Respect of the rising trendline remains likely and would suggest another primary advance.

ASX 300 Metals & Mining

The ASX 300 Banks index rallied strongly in 2016/2017 but bearish divergence on the Trend Index now warns of strong selling pressure. Breach of primary support at 8000 would signal renewal of the primary down-trend, with a target of 7000. A down-trend in its largest sector would weigh on the entire ASX 200 index.

ASX 300 Banks

Gold & Dollar: The big picture

Continuing with long-term, monthly charts, the Dollar Index is in a primary down-trend. The latest rally is likely to respect resistance at 92. Breach of support at 88 would signal another decline.

Dollar Index

* Target calculation: 91 – (95 – 91) =87

Gold has formed a broad base over the last 4 years. Breakout above resistance at $1350 per ounce is likely in the long run, aided by a weaker Dollar, and would signal a primary advance.

Spot Gold

The All Ordinaries Gold Index is in a primary up-trend. The large ascending triangle is testing resistance at 5000/5100. Breakout would signal a primary advance with a long-term target of 6000*. But the declining Trend Index warns of medium-term selling pressure and penetration of the rising trendline would warn that momentum is slowing.

All Ords Gold Index

* Target calculation: 5000 + (5000 – 4000) = 6000

East to West: The long game

It pays to regularly step back from daily fluctuations that characterize short-term charts, to examine the big picture using monthly or even quarterly charts.

Over the last 20 years there is one clear winner when comparing major indexes. India.

Major Index Comparison over 20 Years

Even after adjusting for a weaker (INR) currency.

US Dollar compared to Indian Rupee and Chinese Yuan

Over the last 5 years, however, the DJ China 15 Index has outstripped the Dow Industrial Average and DJ India 15 when measured in US Dollars.

Dow Jones US, India & China in USD

But the picture changes when comparing ETFs based on broader-based indexes.

Dow Jones US, India & China in USD last 2 years

While volatility is a problem, growth in these two rapidly-expanding economies (India & China) should not be ignored if investing for the long run. Nor the absence of long-term growth in the UK, Europe and Japan.