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

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.


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*.


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

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

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

Opportunities in Australian banks | Franklin Templeton

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

Australia: ASX 200 weak but support for banks

The ASX 200 penetrated its lower trend channel, indicating that the up-trend is slowing. This week’s long tail indicates short-term buying pressure but not necessarily a reversal. Breach of primary support at 5100 would warn of another decline (4700). Bearish divergence on Twiggs Money Flow indicates long-term selling pressure.

ASX 200

The ASX 300 Banks Index is consolidating between 7200 and 8000. Declining Twiggs Money Flow peaks warn of long-term selling pressure but this week’s blue candle suggests short-term support. A test of primary support at 7200 remains more likely but a failed swing that recovers to 8000 would be a bullish sign. Breakout above 8000 (still unlikely) would signal a primary up-trend.

ASX 300 Banks Index

India: SENSEX trend channel

India’s Sensex respected support at the lower channel of a linear regression channel from March 2016. Short candlesticks for the last two weeks indicate some hesitancy, but breakout above 29000 is likely and would indicate a test of long-term resistance at 30000. Rising Twiggs Money Flow, with troughs above zero, indicates long-term buying pressure.


China: Hang Seng retreats

Hong Kong’s Hang Seng Index (monthly) broke resistance at 24000 after a strong up-trend, but this week retreated below the new support level. Expect a test of the rising trendline around 22000. A Twiggs Money Flow trough above zero would confirm long-term buying pressure.

Hang Seng Index

The Shanghai Composite Index (monthly chart) continues to range below resistance at 3100.

Shanghai Composite Index

UK: Footsie buying pressure

Footsie retracement continues to look promising. Twiggs Money Flow high above zero suggests long-term buying pressure. Respect of support at 6400/6500 would establish a solid base for another attempt at 7000/7100*.

FTSE 100

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

DAX disappoints

Germany’s DAX retreated below its new support level at 10500, suggesting another test of the long-term rising trend line. A Twiggs Money Flow trough above zero would indicate long-term buying pressure. But expect a slower, more gradual primary up-trend.


S&P500 consolidation suggests another downward leg

The S&P 500 is consolidating between 2120 and 2150 after a rounding top. Short-term consolidation (I would hesitate to call this a pennant) suggests another downward leg is likely, with a target of 2080. Respect of primary support at 2000 remains likely. Recovery above 2200 would complete a bullish rounded top (an inverted “U”) or a stronger inverted scallop pattern (resembling an inverted fishing hook) depending on the length of the right-hand leg. Twiggs Money Flow high above zero continues to indicate long-term buying pressure. Breach of primary support at 2000 is unlikely but would warn of another test of 1800.

S&P 500 Index

* Target calculation: 2200 + ( 2200 – 2000 ) = 2400

Bayer, Monsanto in $88b deal that could reshape the world’s food supply

From Drew Harwell:

The German chemical company Bayer said it will take over US seed giant Monsanto to become one of the world’s biggest agriculture conglomerates.

The $US66 billion ($88 billion) deal – the largest corporate mega-merger in a year full of them – could reshape the development of seeds and pesticides necessary to fuelling the planet’s food supply…..

Bayer in the US is known largely for its pharmaceuticals, with scientists who developed modern Aspirin and Alka-Seltzer. But the deal would pivot the 117,000-employee company more towards its farm-targeting business in agriculture chemicals, crop supplies and compounds that kill bugs and weeds.

Monsanto is the world’s largest supplier of genetically modified seeds, which now dominate American farming but are still a major source of environmental protests in Europe and abroad. The 20,000-employee company also develops Roundup, the weed-killing herbicide.

This is a merger of two giants in the agricultural and chemicals sectors and could lead to some interesting new developments in the future.

Source: Bayer, Monsanto in $88b deal that could reshape the world’s food supply

S&P 500 looks promising

The inverted fish hook on the S&P 500 looks promising, with a strong blue candle reversing most of Friday’s losses. Completion of an inverted fish hook (normally called an inverted scallop but I find the former more descriptive) requires a breakout above 2190/2200. Completion of the pattern would offer a strong bull signal with a target of 2400, calculated from the base of the pattern at 2000*.

S&P 500 Index

* Target calculation: 2200 + ( 2200 – 2000 ) = 2400

Credit bubbles and their consequences

Interesting paper from the San Francisco Fed by Òscar Jordà, VP Economic Research at the San Francisco Fed, Moritz Schularick, professor of economics at the University of Bonn, and Alan M. Taylor, professor of economics and finance at the University of California, Davis. They discuss the difficulty in identifying asset bubbles and the relationship of asset bubbles to credit.

A defining feature of advanced economies in the post-World War II era is the rise of credit documented in Jordà, Schularick, and Taylor (2016). This is visible in Figure 1, which displays the cross-country average ratio to GDP of unsecured and mortgage lending since 1870. Following a period of relative stability, both lending ratios grew rapidly after the war, with mortgages taking off in the mid-1980s….

Most buyers use mortgages to buy homes, but few savers use borrowed funds to invest in the stock market. Thus, one might expect equity price busts to be less dangerous than collapses in house prices: A crash in the price of assets financed with external (rather than internal) funds is likely to have deeper effects on the economy. As collateral values evaporate, some agents will delever to reduce their debt burden, in turn causing a further collapse in asset prices and in aggregate demand. The more widespread this type of leverage is, the more extensive the damage to the economy. Integrating the role of credit into the analysis of asset price bubbles is therefore critical.

Anna Schwartz discussed the issue in a 2008 interview with the Wall St Journal. Then 92 years old, the co-author with Milton Friedman of A Monetary History of the United States (1963) nailed the cause of asset bubbles:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates …..

The problem is not asset bubbles, whether they be in stocks, housing or Dutch tulips. That is merely a symptom of a deeper malaise: too easy monetary policy. The threat is the underlying credit expansion that caused the problem in the first place.

And while asset bubbles may be difficult to measure, credit bubbles are easy to identify. If credit grows at a faster rate than GDP, that is a credit expansion. The ratio of credit to GDP should be maintained in a narrow, horizontal band.

US Bank Loans & Leases to GDP

Easy to monitor and easy to correct, if the Fed is looking in the right place. But central banks are good at looking elsewhere — and closing the gate long after the horse has bolted. A similar problem is evident in Australia.

Australia Credit to GDP

Even worse if we look at household credit to disposable income (on the left below).

Australia Credit to GDP

Unfortunately the horse has bolted and attempting to contract the level of debt would cause a deflationary spiral with devastating consequences. The only way to restore sanity is to hold debt steady at current (nominal) levels and allow growth and inflation to gradually reduce the GDP ratio to more stable levels.