ASX: Banks and Miners v the Rest

The struggle between miners and banks is changing.

The ASX 200 rallied this week, breaking out of its downward trend channel. Although in a primary down-trend after breaching 5800, the index is enjoying strong support.

ASX 200

And that is despite the Banks taking a hammering.

ASX 300 Banks

Miners did nothing this week.

ASX 300 Banks

But most other sectors rallied strongly: Consumer Staples…

ASX 200 Staples

Consumer Discretionary, Health Care…

ASX 200 Health Care

Utilities and Industrials.

ASX 200 Industrials

The change reflects a rosier global outlook, with Commodities rising, but I doubt that it can last without support from the ASX 200’s two biggest sectors.

Australian gold stocks rally despite stronger Dollar

Interesting turn in the gold/dollar saga.

The US Dollar Index is strengthening, testing resistance at 91. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

The Dollar is strengthening despite rising crude prices which generally weaken the Dollar.

WTI Light Crude

Spot Gold is retreating from resistance at $1350/ounce. Bearish divergence on the Trend Index warns of selling pressure. Expect a test of $1300.

Spot Gold

But Australian gold stocks are strengthening. The All Ordinaries Gold Index is rallying to test resistance between 5000 and 5100.

All Ordinaries Gold Index

That’s because the Australian Dollar is falling at a faster rate than the Dollar Index is strengthening.

AUDUSD

So the price of gold in Australian Dollars is actually rising.

Spot Gold in Australian Dollars

Leaving Australian gold stocks unperturbed by the strengthening US Dollar.

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

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

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

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.

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

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

ASX 200: Bank relief but miners bearish

The ASX 300 Metals & Mining index broke support at 3500, warning of a test of primary support at 3300. The long-term up-trend is losing momentum.

ASX 300 Metals & Mining

Banks continue in a long-term down-trend but recovery above the former primary support level at 8100 offers temporary relief. Respect of the declining trendline warns of another test of primary support at 8000. Breach would signal a primary decline.

ASX 300 Banks

The ASX 200 remains hesitant. Bearish divergence on the Trend Index continues to warn of long-term selling pressure. A primary down-turn on either banks or miners would strengthen the bear signal. Breach of support at 5800 would signal a primary down-trend.

ASX 200

Gold waits on the Dollar

The Dollar Index continues to consolidate below resistance at 90.50. Downward breakout is likely and would offer a target of 87*.

Dollar Index

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

Gold is ranging between $1300 and $1350 per ounce. A declining Dollar is bullish for gold. Breakout above $1375 would offer a target of $1450*.

Spot Gold

* Target calculation: 1350 + (1350 – 1250) = 1450

The All Ordinaries Gold Index is testing resistance at 5100. Upward breakout would signal a primary advance with a long-term target of 6000*.

All Ords Gold Index

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

ASX 200: Miners & banks spoil the party

Miners are undergoing a correction. Breach of the rising trendline and support at 3500 on the ASX 300 Metals & Mining index would warn that the up-trend is losing momentum.

ASX 300 Metals & Mining

Banks continue their bearish down-trend, respect of the declining trendline warns of another test of primary support at 8000. Breach would signal a primary decline.

ASX 300 Banks

The ASX 200 will follow if banks and miners, the two biggest sectors, fall. Bearish divergence on the Trend Index continues to warn of long-term selling pressure. Breach of support at 5800 would signal a primary down-trend.

ASX 200

Gold rallies as Dollar meets resistance

The Dollar rally ended, with the Dollar Index encountering stubborn resistance at 90.50. Expect a test of primary support at 88.50. Breach of support would signal a primary decline.

Dollar Index

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

Gold found support at $1310 and is likely to again test resistance at $1360. A declining Dollar would be bullish for gold. Breakout above $1360 would offer a target of $1450*.

Spot Gold

* Target calculation: 1350 + (1350 – 1250) = 1450

The All Ordinaries Gold Index has been undermined by the strong Aussie Dollar but found support at the rising trendline. Expect another test of resistance at 5100. Breakout would signal a primary advance.

All Ords Gold Index

ASX 200 back from the brink

A positive week for the ASX 200 index as Australian banks came back from the brink, recovering above primary support at 8100. Expect a rally to test the declining LT trendline around 8350 but selling pressure continues, with the Trend index below zero, and another test of primary support, this time at 8000, is likely.

ASX 300 Banks

Miners continue their up-trend. Although this week’s bearish hanging man candle warns of a correction.

ASX 300 Metals & Mining

The ASX 200 will lift for as long as the bank rally lasts but ASX 300 Banks long-term trend is downward. Bearish divergence on the Trend Index continues to warn of long-term selling pressure.

ASX 200

Dollar drives long-term Gold prospects

The Dollar is likely to continue weakening over the next few years according to analysis from a number of major banks. A falling Dollar would be a bull signal for gold investors.

The Dollar Index rallied over the past few days but is likely to encounter stubborn resistance at 90.50. Respect is likely and would signal another test of support at 88.50. Breach of support would warn of another primary decline.

Dollar Index

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

Gold lacks direction, ranging between 1310 and 1360, but that would change dramatically if the Dollar breaches support at 88.50. Breakout above $1360 would signal another primary advance, with a target of $1450*. Follow-through above $1375 would strengthen the signal.

Spot Gold

* Target calculation: 1350 + (1350 – 1250) = 1450

The All Ordinaries Gold Index has been undermined by the strong Aussie Dollar. Further weakness of the greenback would help support commodity prices and the Aussie. But further gains on XGD remain likely and recovery above 5100 would signal another advance.

All Ords Gold Index

Why Aussie banks are weakening

Australian banks are breaking primary support levels. There are two major reasons for this. One is the precarious level of household debt as a result of the housing bubble. The first graph below shows how housing prices have more than doubled compared to disposable incomes (after tax but before interest payments) over the past 30 years. And how household debt has risen, not as a result of, but as the underlying cause of, the housing bubble. Without rising debt there would be no bubble.

Australian House Prices and Household Debt to Disposable Income

Growth in Australian housing prices is now slowing, prompting fears of a correction.

Australian House Price Growth

The second reason is falling returns on equity. Banking regulators have increased pressure on major banks to improve lending standards and increase capital backing for their lending exposure. For decades banks were given free rein to increase lending without commensurate increases in capital, to the extent that the majors hold only $4 to $5 of common equity for every $100 of lending exposure. Low interest rates, increases in capital and slowing credit growth have all contributed to the decline in bank equity returns to the low teens.

Australian Banks Return on Equity