Could the Aussie banks outperform?
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While the banks have begun to stabilise in relative-performance terms, there is insufficient evidence to suggest they are about to outperform the broader market, technical analyst Lesley Beath says.
As far as global equity markets are concerned, Australia took the wooden spoon last week. The All Ords declined by 2.4 per cent, whereas the best performer, the Japanese Nikkei, was up 3.5 per cent.
European equity markets fared well, while the smaller Asian markets were mixed.
In the US, the major indices were marginally higher. Once again the US Banks Index was one of best performers, adding another 2.2 per cent.
The index gained 7 per cent in August. It pushed through lateral resistance during the week, confirming the break of the 2015 downtrend.
European and Japanese banks also performed well over the month, with the Euro Stoxx Banks Index up 6.4 per cent and the Topix Banks Sub-Index up 7.4 per cent (according to the Financial Times, 31 August).
In comparison, the ASX Banks Index declined by 2.3 per cent in August. Tthe ASX Banks Accumulation index posted a 1.4 per cent loss.
The action in the US equity market, as I said last week, is a little disconcerting as the major indices trade in a tight range. But they are holding up at this stage, so there are no real cracks in the price action.
The Dow Transport Index remains below its key barrier--a 1.8 per cent rise last week pushed the index closer to that lateral resistance.
The VIX tumbled on Friday, giving up the gains (albeit marginal) of the past couple of weeks. It signals a high degree of complacency, as it has since mid-July. However, that doesn't constitute a sell signal.
I remain cautious on the US equity market at this stage, but it has yet to register a confirmed sell signal.
I mentioned a few weeks ago that I expected the US to underperform its European peers, and that is still the case.
We have been watching the German DAX and its break of the 2015 downtrend--the French CAC confirmed a similar break last week. Spain and Italy have also pushed above resistance.
In Japan, both the Nikkei and the Topix are below their 2015 downtrends. They are now in close proximity to their 200DMA. As such, they are approaching an important barrier.
Action in both indices appears constructive, but whether or not they can break topside is uncertain.
As I mentioned earlier, Australian equities had a poor week. Resource stocks weighed heavily on the market, with the ASX Materials Index down by almost 4 per cent. The ASX 100 Resources declined by a similar amount.
That kept the various resource/industrial ratios (that have been highlighted in recent reports) below the resistance that we have been monitoring.
We will be keeping a close eye on these ratios, in an attempt to determine whether or not the run of outperformance by the resource stocks, since early this year, is finished.
If so, and that is not confirmed at this stage, could it be the banks that will outperform?
Let's think about that.
In July, the ASX Banks Index pushed above the downtrend linking the August 2015, December 2015 and the May 2016 highs. However, the index failed to make much headway as it was unable to break above lateral resistance.
The index has drifted lower since early August and is now back at the downtrend. A quick turnabout is needed if the index is avoid retreating into the downtrend.
(One could argue the correct downtrend on which to focus is that which emanates from the March 2015 all-time high. If we look at that one, it was broken some time ago. But in my opinion, I think the August 2015 is the one to watch.)
The weak performance by the banking sector in August was due to Commonwealth Bank of Australia (ASX: CBA) and Westpac (ASX: WBC). The former traded ex-dividend and ended the month 7 per cent lower. Westpac dropped 5 per cent.
The other two majors advanced. CBA is now probing the lows of the past 12 months. As those lows represent a 50 per cent retracement of the 2011-2015 advance they act as substantial support.
If broken, the next downside target is toward the $64 level. So it is important that recent lows are not violated.
Westpac is trading below its declining 200DMA, whereas National Australia Bank (ASX: NAB) is now testing that average. Australian and New Zealand Banking Group (ASX: ANZ) is the only one of the big four trading above it.
At this stage, although the banks have begun to stabilise in relative-performance terms, I do not think there is sufficient evidence to suggest they are about to outperform the broader market. Let's keep a close eye on the situation.
On a different subject, it is interesting to note there are a number of stocks that have retreated to their 200DMA.
Regular readers will know the importance of the 200DMA and the fact it can act as support in a rising trend. In fact, it is not uncommon for price to retreat to that average during a corrective phase.
At times, in a sharply rising trend, the 200DMA can sit at a significant distance below the current price level.
We looked at Bellamy's (ASX: BAL) and The A2 Milk Company (ASX: A2M) a few weeks ago, noting that price fell some 40 per cent before testing the average. But that is not the norm, and in most cases, the distance from the 200DMA will not be as large.
At the moment, the stocks which have pulled back to their 200DMA include: CSL Limited (ASX: CSL), Transurban (ASX: TCL), Westfield Corporation (ASX: WFD), Brambles (ASX: BXB), Alumina Limited (ASX: AWC), Adelaide Brighton (ASX: ABC), and gold stocks Northern Star (ASX: NST) and Perseus Mining (ASX: PRU).
Given these stocks are diverse, I think their near-term action may give some guidance as to the health of the broader market. A break of the 200DMA would be a negative development.
In the case of the latter three, the pullback to the 200DMA comes early in the new uptrend, so there has been little price erosion. There is no threat to the uptrend at this stage, but I would not want to see too much more weakness.
Qantas (ASX: QAN) on the other hand rallied up to its 200DMA the week before last and subsequently declined.
The average will act as a significant barrier. Price needs to break above the August high at $3.58 to improve the profile.
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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does have an interest in the securities disclosed in this report.
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