Market action favours ASX financials outperformance
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Last week's action tips the odds in favour of an outperformance by the ASX financials. However, it may be outperformance by default, says technical analyst Lesley Beath.
One of the more distinctive moves last week, in my opinion, was the snap-back in the resource markets.
There was an abrupt change in investor sentiment, leading to weekly "key reversals" in Brazil, Canada, Argentina, and the ASX Midcap Resources Index.
The ASX 100 Resources and the ASX Materials Index both declined by 4 per cent. The strong resistance on both those indices has been highlighted in recent reports, and in last week's report I also presented charts highlighting the resistance on the ASX Materials/ASX Financials ratio, and also the ASX Materials/ASX Banks ratio.
The big question, whether to be overweight financials or resources, is often on the radar and I said in last week's report: "The situation is taking time to resolve--which is not that unusual. I won't go into a detailed description of the action--a picture paints a thousand words so they say, so I'll let the charts do the talking. I'd be leaning towards outperformance by the financials at this stage, but let's wait for some clarity."
I think that last week's action tips the odds further in favour of the financials.
But will that be outperformance by default? That is, will the banks break topside or will the resources simply decline more than the banks?
The banks face strong resistance at current levels (we discussed this last week) so until there is evidence to confirm continued upside from current levels--I would have to say it will most likely be that the resources decline more than the banks.
Strong resistance is also evident on other components of the financial sector, particularly the insurance sector. Insurance Australia Group (ASX: IAG), QBE Insurance Group (ASX: QBE), Suncorp Group (ASX: SUN) and AMP Limited (ASX: AMP) are examples.
We could get a topside break in the banks and these insurance stocks over the next few weeks, and if we do, that would be great for the Australian market. But at this stage, I think caution is warranted.
Also, you can keep your eye on the ASX Financials/All Ords ratio, if you can get the data. Watch the early-January high--a break above there would be favourable for the financial side of the market.
If that resistance is not overcome, then we could see the situation where the smaller end of the market outperforms the larger-cap stocks.
I have spoken about this in the last two reports, as I highlighted the ASX Small Ordinaries/ASX All Ordinaries ratio. Remember, we are monitoring the 2016 lows. It is too early to call yet, but I do think the ratio could be turning in favour of the smaller stocks.
Again, this could just be that the smaller stocks hold up better than the 20 Leaders. Given that both the ASX Small Industrials and the ASX Small Resources are below solid resistance at the moment, the latter scenario sounds more likely.
I think that all these ratios are suggesting a change may be evolving. If it is, then it should provoke some thought as to where investors could focus over the next few months.
As far as the All Ords and the ASX 200 are concerned, the key barrier remains the February high. I said last week that "I think the odds of a topside break in this instance are higher than they were in January (albeit marginally), but I would wait for the breakout before becoming optimistic".
There is no change to that view, and with the banks facing resistance and the resources unable to break topside, I don't think the broader market indices are showing the strength to break above the February highs.
Time will tell. But a word of warning; if the All Ords breaks above the February high and that break is not accompanied by a topside break in the banks and the major resource stocks, don't trust it.
In the US, the S&P 500 and the Dow Industrials continued to push gently higher. Although the recent move in the Dow is creating headlines with its so-called "winning streak"--up for 11 days--I can't see any overextension here, just some gradual progress.
The "winning streak" is being compared to 1987 when the Dow pushed higher for 12 consecutive days (according to data from the Dow Jones Market Data Group). References to 1987 always make for good headlines--bad news sells--but the winning streak in 1987 was in the January, well ahead of the October crash. So, don't take too much notice of the headlines.
Interestingly, the Dow Utilities pushed sharply higher last week. I said in the last report that "although still below the 200DMA, I think the action in the Dow Utilities Index is now quite constructive". So, it was nice to see the index pop 4 per cent on the week.
US T-Bonds rose last week, as yields fell. The T-Bond is still holding above the strong support that has been highlighted on a number occasions. The US 10-year T-Note is also on strong support. Yields look set to go lower in the short term.
Once again, currency markets were subdued. The tussle between the US dollar and the euro continues. No side is making much ground. The US dollar continues to deteriorate against many of the emerging market currencies.
The Australian dollar is still facing strong resistance against both the US dollar and the euro. I know I have noted this in recent reports, but this is an important level for the A$. I don't think there will be a topside break, but as always, we will be guided by the price action as it unfolds.
In reviewing the action on the other commodity-related currencies, there are some early and tentative (and I stress tentative) signs to suggest the possibility of a reversal in the Brazilian real, the Chilean peso, and the Russian rouble. This adds to the cautionary outlook for the Australian dollar.
As I always say, we should never look at any market in isolation--we get far more insight when we view the world with peripheral vision.
Well, that's it from me.
I hope that you have enjoyed following my reports all these years. I certainly have enjoyed writing them and sharing my thoughts with you.
If anyone wants to be in touch with me for any reason, please contact me at firstname.lastname@example.org or via Morningstar customer service.
I will be taking a few weeks off and then I will begin to write again. It might take a bit of time to set myself up but you will find me at lesleybeath.com.
Thanks again for all your support over the years.
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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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