2 More Warning Signs for the ASX

The recent Iron ore rally has faded and the commodity is again testing support at $60. Twiggs Momentum (13-week) below zero indicates a primary down-trend.

Iron ore

The ASX 300 Metals & Mining Index broke support at 2850, warning of a down-trend. A Twiggs Money Flow peak below zero flags strong selling pressure.

ASX 300 Metals & Mining

Falling ore prices will place strong downward pressure on the ASX and the Aussie Dollar.

Aussie Dollar

ASX 300 Banks Index retreated below 9000. Declining Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 8900, or Twiggs Money Flow below zero, would warn of a correction.

ASX 300 Banks

The large red engulfing candle on the weekly ASX 200 chart also warns of a (secondary) reversal. Breach of support at 5800 would signal a correction. Twiggs Money Flow still shows long-term buying pressure and only a fall below zero would warn of a market top (primary trend reversal).

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 200 advance slows as iron ore falls

Iron ore found support at $60.

Iron ore

The ASX 300 Metals & Mining Index has taken some encouragement from the rally, with support at 2850. But bear rallies are normally short in duration and reverse sharply.

ASX 300 Metals & Mining

The ASX 200 advance has slowed after the recent sell-off in the resources sector. But rising Twiggs Money Flow still signals buying pressure and another attempt at 6000 seems likely.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 300 Banks, the largest sector in the broad index, is consolidating above its new support level at 9000. Declining Twiggs Money Flow warns of medium-term selling pressure. Reversal below 8900 is unlikely but would warn of a correction.

ASX 300 Banks

Bank exposure to residential mortgages is the Achilles heel of the Australian economy and APRA is likely to keep the pressure on banks to raise lending standards and increase capital reserves, which would lower return on equity.

IMF predicts Australian GDP rise but iron ore drops

From Latika Bourke at Sydney Morning Herald:

Australian economy to boom as unemployment drops, IMF

…The IMF predicts Australia’s economy will grow by 3.1 per cent in 2017 and 3 per cent in 2018. This is better than the most recent forecast by the Australian Treasury and released by the Australian government in December last year, which predicted GDP would “pick up to 2¾ per cent in 2017-18 as the detraction from mining investment eases.”

Broad projections like those of the IMF offer little comfort. The very next headline warns of falling iron ore prices:

From Timothy Moore at The Age:

Spot iron ore extends retreat, sliding another 4.6pc

The spot price of iron ore now has fallen one-third from its February peak, as the slide into a bear market turns into an accelerating rout.

At its Tuesday fix, ore with 62 per cent iron content slid $US3.05, or 4.6 per cent, to $US63.20 a tonne, according to Metal Bulletin. The price has tumbled more than 20 per cent so far this month….

Breach of the rising trendline warns that spot iron ore is likely to test primary support at 50. Reversal of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Iron Ore Spot Price

Falling resources stocks are dragging the ASX 200 lower. The up-trend is still intact but expect strong resistance at 6000. Reversal below 5680 would signal reversal to a down-trend.

ASX 200

3 Headwinds facing the ASX 200

The ASX 200 broke through stubborn resistance at 5800 but is struggling to reach 6000.

ASX 200

There are three headwinds that make me believe that the index will struggle to break 6000:

Shuttering of the motor industry

The last vehicles will roll off production lines in October this year. A 2016 study by Valadkhani & Smyth estimates the number of direct and indirect job losses at more than 20,000.

Full time job losses from collapse of motor vehicle industry in Australia

But this does not take into account the vacuum left by the loss of scientific, technology and engineering skills and the impact this will have on other industries.

…R&D-intensive manufacturing industries, such as the motor vehicle industry, play an important role in the process of technology diffusion. These findings are consistent with the argument in the Bracks report that R&D is a linchpin of the Australian automotive sector and that there are important knowledge spillovers to other industries.

Collapse of the housing bubble

An oversupply of apartments will lead to falling prices, with heavy discounting already evident in Melbourne as developers attempt to clear units. Bank lending will slow as prices fall and spillover into the broader housing market seems inevitable. Especially when:

  • Current prices are supported by strong immigration flows which are bound to lead to a political backlash if not curtailed;
  • The RBA is low on ammunition; and
  • Australian households are leveraged to the eyeballs — the highest level of Debt to Disposable Income of any OECD nation.

Debt to Disposable Income

Falling demand for iron ore & coal

China is headed for a contraction, with a sharp down-turn in growth of M1 money supply warning of tighter liquidity. Falling housing prices and record iron ore inventory levels are both likely to drive iron ore and coal prices lower.

China M1 Money Supply Growth

Australia has survived the last decade on Mr Micawber style economic management, with something always turning up at just the right moment — like the massive 2009-2010 stimulus on the chart above — to rescue the economy from disaster. But sooner or later our luck will run out. As any trader will tell you: Hope isn’t a strategy.

“I have no doubt I shall, please Heaven, begin to be more beforehand with the world, and to live in a perfectly new manner, if — if, in short, anything turns up.”

~ Wilkins Micawber from David Copperfield by Charles Dickens

ASX stalls at 5800

Banks have run into resistance, with the ASX 300 Banks Index retreating below 9000. The recent false break (above 9000) is a mildly bearish sign but the long-tail on this week’s candle is mildly bullish. Follow-through above 9100 remains more likely and would signal an advance to 9500*.

ASX 300 Banks

* Target medium-term: 9000 + ( 9000 – 8500 ) = 9500

This is not a criticism of the policy, but recent rate hikes on investor mortgages become a self-fulfilling prophecy. Concerns about the housing market lead banks to hike rates. Higher rates discourage new borrowing, leading to a contraction in demand. Which in turn leads to lower house prices.

Miners continue their downward path. The ASX 300 Metals & Mining Index has broken its long-term rising trendline, while Declining Twiggs Money Flow peaks below zero warn of strong selling pressure.

ASX 200

With its two biggest sectors meeting resistance, the ASX 200 is stuck at 5800. But rising troughs on Twiggs Money Flow (above zero) signal buying pressure. Breakout above 5800 is likely and would signal a test of 6000*. Reversal below 5600 is unlikely but would warn of a correction.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 200 bullish

The ASX 200 is testing resistance at 5800 after a weak retracement. Rising Twiggs Money Flow troughs above zero signal strong buying pressure. Breakout above 5800 is highly likely and would signal a test of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 200 slows as resources fall

The Australian Resources sector has been on a tear over the last 12 months, something I was slow to pick up on. China’s PBOC stepped in to boost a slowing economy, sending property prices surging. But now the central bank is tightening monetary policy and housing price growth is slowing.

China House Prices

The ASX 300 Metals & Mining Index is losing momentum, falling below its long-term trendline. Declining Twiggs Money Flow, with peaks near zero, warns of selling pressure.

ASX 300 Metals & Mining

The fall has slowed advance of the ASX 200. Resistance at 5800 is proving stubborn. Breach of support at 5600 would complete a double top reversal, warning of a primary down-trend. But declining Twiggs Money Flow indicates no more than medium-term selling pressure at present, recovery above 5800 is more likely and would signal a test of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 200 retreats

The ASX 200 broke down below its recent consolidation, signaling another test of support at 5600. There is no indication on Twiggs Money Flow of unusual selling pressure and at present I expect support to hold.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX banks lead the charge

The ASX 200 followed-through above 5750 after respecting its new support level at 5600, indicating an advance to 6000*. Rising Twiggs Money Flow signals buying pressure.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Australian banks are leading the charge, with the ASX 300 Banks Index testing 9000. A trough high above zero on Twiggs Money Flow indicates strong buying pressure. Breakout above 9000 would signal another advance.

ASX 300 Banks Index

Bank profits have declined for the last two years, but Bad and Doubtful Debt Charges are not a major cause.

RBA Chart Pack: Bank Profits and Bad Debt Expenses

The main culprit is declining return on equity as banks beefed up capital ratios and risk-weighting on residential mortgages in response to pressure from APRA.

RBA Chart Pack: Bank Return on Equity

ASX finds support

The ASX 200 respected its new support level at 5600. Twiggs Money Flow respected the zero line, suggesting buying pressure. Follow-through above 5750 would offer a target of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 200 correction

The ASX 200 continues to test its new support level at 5600. Twiggs Money Flow is now declining, reflecting medium-term selling pressure. Breach of support is likely and would test the lower trend channel around 5500 but the primary up-trend is unchanged.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

The ASX 300 Banks Index has undergone a sell-off in the last few weeks, weighing heavily on the broader index. Declining Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 8000 would indicate that the up-trend is intact.

ASX Small Ordinaries Index

ASX 200 strengthens

The ASX 200 is testing its new support level at 5600. Rising Twiggs Money Flow indicates medium-term buying pressure. Respect of 5600 is likely and would signal an advance to 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Small cap stocks, represented by the ASX Small Ordinaries Index, are weaker, indicating the market remains risk-averse. Twiggs Money Flow below zero continues to indicate selling pressure.

ASX Small Ordinaries Index

ASX risk off

The ASX 200 is retracing to test its new support level at 5500. Bearish divergence on 21-day Twiggs Money Flow warns of short-term selling pressure. Recovery above 5600 would signal a primary advance to 6000*.

ASX 200

* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000

Small cap stocks, represented by the ASX Small Ordinaries Index, however, indicate the market is adopting a risk off approach at present. While institutional stocks advance, the small caps index is undergoing a sell-off, with Twiggs Money Flow reflecting strong selling pressure.

ASX Small Ordinaries Index

A line has formed over the last 7 weeks. Breakout below this level would warn of another decline (and a primary down-trend).

ASX: Steam or froth?

The ASX 200 broke resistance at 5500. Follow-through above 5600 would confirm a primary advance with a long-term target of 6000*. Rising Twiggs Money Flow indicates medium-term buying pressure.

ASX 200

* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000

The ASX 300 Banks Index has followed through after breaking resistance at 8000. Expect retracement to test the new support level but respect is likely.

ASX 300 Banks

What could go wrong?

….Apart from a precarious property bubble in China fueling commodity exports, a property bubble in Australia fueled by record low interest rates and equally precarious immigration flows, declining business investment and slowing wages growth.

The ASX price-earnings ratio is close to historic highs, suggesting we are in Phase III of a bull market — where stocks are advanced on hopes and expectations of future growth rather than on concrete results. By all means follow the rally, but keep your stops tight.

Are stocks overpriced?

Some good discussion on our forum regarding current high stock valuations, based more on hopes than on earnings.

This chart of Price-Earnings ratios highlights the problem. PEs for both the MSCI World Index (ex-Australia) and the ASX 200 are close to historic highs (after the Dotcom bubble).

Price-Earnings

Strong earnings growth would soon fix this but there is little sign of that at present.

ASX banks rally

The ASX 200 is testing resistance at 5500. Rising Money Flow indicates selling pressure has ended. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*.

ASX 200

ASX 300 Banks Index followed through above 8000 after a brief retracement respected the new support level. Target for the primary advance is 8800*. A further secondary correction to test the new support level at 8000, however, should not be ruled out. A Twiggs Money Flow trough above zero would strengthen the bull signal.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800

ASX 200 threatens a bear trap

The ASX 200 broke through short-term resistance, a bullish sign, and is testing long-term resistance at 5500. In terms of classic Dow Theory, the primary down-trend is intact until there is a breakout above 5500. Today’s small doji candle indicates hesitancy but bullish divergence on 21-day Twiggs Money Flow signals medium-term buying pressure. Breakout above 5500 would also complete a bear trap, where breach of support is quickly reversed and followed by breakout to a new high. This is a powerful bull signal and would offer a target of 5800* for the primary advance.

ASX 200

* Target medium-term: 5500 + ( 5500 – 5200 ) = 5800

ASX 200 runs into a hammer

The ASX 200 is again running into resistance, signaled by a hammer after the recent rally. In terms of Dow Theory, the primary down-trend is intact but retracement that respects the former primary support level of 5200 would suggest a bear trap. Recovery above 5500 is still in doubt but would offer a bull signal.

ASX 200

ASX 300 Banks Index broke out above 8000 but this week’s short candlestick body warns of hesitancy. Expect retracement to test the new support level. Failure of support would warn of a bull trap. Respect of support is as likely, however, and would confirm a primary up-trend with a target of 8800*. Recovery of Twiggs Money Flow above zero is still tentative at this stage.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800