Is now a good time to buy?
Page 1 of 1
Given the banks have rallied hard, resources are losing upward momentum, and the Dow Utilities is facing its downtrend, some short-term restraint is warranted, technical analyst Lesley Beath says.
A lot has happened since my last report in early December.
Probably the most important, from the Australian investor perspective, is the strong performance by the Australian banking sector.
At the time of writing the last report, the major banks were still trading below significant resistance. That changed on 8 December when Commonwealth Bank of Australia (ASX: CBA), Australian and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) all broke decisively though resistance. National Australia Bank (ASX: NAB) followed suit the next day.
That propelled the ASX 20 Leaders Index through the resistance that had stalled every advance throughout 2016.
The All Ords broke through its 2016 high in late December. The All Ordinaries Accumulation Index broke to all-time highs the week ending 9 December.
The resource side of the market, which had outperformed throughout 2016, stalled below resistance in early December and has failed to make much headway over the past few weeks.
A similar outcome was evident in the resource-based economies of Chile and Brazil. And if we look at the ASX 200 Resources/ASX 200 Financials ratio, it is retreating from lateral resistance.
Copper, aluminium and iron ore remain below their 2011 downtrend. That said, despite the resistance, the price action does not look that onerous at this stage.
Charts show the pullback in copper and aluminium after testing the downtrend. Copper actually managed to break topside but has since retreated below the downtrend. The sharp rally from late October needed to take a breather, and it has.
The big question now is whether these metals can push through their 2016 highs. As the downtrend on these metals corresponds to the downtrend on the ASX 200 Resources Index, it would be wise to sit on the sidelines until the situation resolves. Let's keep a close eye on it!
Oil finally broke above its recent range in late December but the move, to date, looks lacklustre, with no strong momentum characteristics.
Australian gold stocks advanced, with the ASX Gold Index rallying 26 per cent since mid-December. This has sparked the attention of the financial press, with articles talking about the gold sector being in an official bull market.
It's true that the official definition of a bull market is a rise of 20 per cent or more; but I believe the gold sector is simply rebounding from an oversold level. The recent rally has taken some of the major gold stocks up to test their 200DMA-- this is quite normal in any downtrend.
And just because the advance has been steep doesn't mean this is the beginning of a new upswing. If the major gold stocks break above that 200DMA, we can reassess the situation.
Ramelius Resources (ASX: RMS) is the odd one out here. It did not break below its 200DMA; instead it bounced from it and has pushed up to test its 2016 highs.
The breakout in the Australian banking stocks followed the decisive topside break in the German and French markets on 7 December. That break was significant as it pushed through the resistance that had capped upside since early September. In France, the resistance dated back to April.
The UK FTSE finally overcame its key barrier in late December.
In the US, the major indices put in some diverse performances. The Dow Transports, which had led the market since early November (when it broke topside), has retreated since peaking in early December.
It ended the month flat, as opposed to the Dow Industrials, which advanced by 3.3 per cent. However, most of the gains in the Dow Industrials were registered in the first half of the month, with a flat performance in the second half.
It was a similar case for the S&P 500, the Russell 2000 and the S&P Banks Index; they also have been flat since mid-December.
The Dow Utilities peaked in July along with the US T-Bonds. The Utilities retreated by 15 per cent into November, before bouncing; it is now facing the July downtrend so it will be interesting to see if it can break topside.
Bonds have stabilised in an area of strong support and momentum indicators are improving from oversold levels.
Going through the charts of the major US stocks, they appear robust. But will the psychological 20,000 level on the Dow hinder performance? While round numbers can act as resistance, it is probably more relevant when it comes to individual stocks.
And, although the NASDAQ is also hovering near the round number 5000 level, I can't see too much evidence in the price action to suggest a major pullback is imminent.
I do note, however, that the VIX is at the lower limits of its four-year range. Over the past couple of years, current levels have been associated with either a pause in the uptrend, or a pullback.
On the currency front, the Australian dollar has gained some ground over the past week but at this stage it just looks like a short-term rebound within the existing downtrend. If you remember, the dollar broke the uptrend from the January 2016 low in mid-November after testing the 2013 downtrend the week prior.
I said at the time the "technical position of the Australian dollar remains weak and further declines are likely. The monthly chart shows the lacklustre profile of the rally from the 2016 lows. Stepping back and taking an unbiased view of that chart, you could argue the 2016 advance was simply a countertrend rally within a long-term bear market".
"Under that scenario, a re-test of the 2016 lows is probable, and a break below them a distinct possibility."
At this stage, there is no change to that view and risk, over the medium term, remains to the downside.
The US Dollar Index broke topside in November, and then retreated to test the breakout point. It then rebounded strongly in the first half of December, but then stalled in the second half; in a similar fashion to the US equity market.
At first glance there does not appear to be any significant resistance but the index has retraced a Fibonacci 61.8 per cent of the 2001-2008 bear market. That retracement level, although not obvious to all, can act as a barrier. So, the index needs to push above last week's high at 1.0382 to signal continued strength.
The euro/US dollar broke below its key support in mid-December, but the euro has not succumbed to selling pressure as yet. It pushed up to the old support (now resistance) last week, so we should get a resolution relatively quickly.
Given the importance of these support (euro /US dollar) and resistance levels (US Dollar Index), we need to wait for a resolution before adopting a strong view.
So, given the breakout in the Australian equity market, is this a good time to buy? Unfortunately, I think the opportunity to add to exposure in the banks has passed for the time being. The opportunity presented itself when resistance was overcome on 8 December.
The banks have since rallied hard and are now in overbought territory. The resources are losing upward momentum. The ASX Utilities Index has rallied almost vertically since mid-November and is now testing its 2016 high. The ASX REITS Index has rallied up to test the underside of its 200DMA.
And with the Dow Utilities index facing its downtrend, and the VIX at such low levels, some short-term restraint is warranted.
Use the links below to view the various chart packs.
More from Morningstar
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.
© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.