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Markets seem too quiet for comfort

Lesley Beath  |  24 Oct 2016Text size  Decrease  Increase  |  

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While investors still await some guidance, the outlook for US and Australian indexes is not really a reflection of the opportunities or risks in individual stocks, technical analyst Lesley Beath says.

 

Most people don't really like change, preferring the status quo; for the purpose of writing this weekly report, some change would be welcome.

But week after week, the situation in global equity, currency and commodity markets, remains the same.

Things seem relatively quiet, and where there is any action, once it has been identified, it is quite boring to talk about it week after week.

As I said last week, it seems a little too quiet for comfort. But the hard thing is that there is nothing to suggest a major change is imminent. How long can this last--who knows?

Let's take a step back and do a quick reconciliation of what's happening.

Firstly, broadly speaking, the major global equity markets are still trading below their key resistance levels. Nothing new here--this has been the case for the past couple of months.

Interestingly, in the US, the banking stocks continue to forge ahead. As noted in previous reports, the S&P Banks Index broke above both the 2015 downtrend and the 200DMA back in August. The break remains intact and further upside appears likely.

It's not only the bank stocks that look solid, the FAANGs (Facebook, Apple, Amazon and Google) also appear robust. And Microsoft finally pushed above its 1999 high last week--unfortunately it failed to close the week above it.

Secondly, as far as commodity markets are concerned, upside potential seems limited. Oil is trading at resistance, gold is on support, and copper is range-bound.

Gold in Australian dollar terms has declined since it tested major resistance in July. It is oversold in the short term, and with the gold price on support, there could be some near-term stability.

But I believe risk over the medium term remains to the downside, in both US-dollar gold, and Australian-dollar gold.

Thirdly, on the currency front, the US dollar continues to push higher. Further upside is anticipated.

The Australian dollar is holding up well against the appreciating US dollar, but the short-term trend is sideways. A major move in either direction, for the Australian dollar, is not envisaged in the short term.

Fourthly, sentiment indicators are mixed, although they are shifting to a more cautious outlook, which from a contrarian viewpoint is positive for the markers.

And lastly, in Australia, one of the major themes in my opinion is the shift away from the small stocks. The ASX 20 Leaders should continue to outperform.

Some of the smaller stocks have been sold off heavily. Recent market darlings have fallen from favour. Domino's Pizza (ASX: DMP) and Blackmores (ASX: BKL) are cases in point.

While many stocks have declined to their 200DMA, and some have broken below it, there are stocks that have registered all-time highs over the past couple of weeks.

They include Credit Corp Group (ASX: CCP), Challenger Limited (ASX: CGF), South32 (ASX: S32), Clear View Wealth (ASX: CVW), Treasury Wine Estates (ASX: TWE), Eclipse Group Limited (ASX: ECX), Money3 Corporation (ASX: MNY), Nearmap Limited (ASX: NEA), Servcorp Limited (ASX: SRV), Webjet (ASX: WEB), and Pact Group Holdings (ASX: PGH).

So it is a very mixed picture. And although I think the ASX Small Ordinaries will underperform, that is not necessarily representative of the small stock universe; it is more a reflection of those major stocks in the ASX Small Ords which dominate the index.

Let's get back to the point. It is quiet. We have highlighted the significant themes, as they have evolved, over the past few months. So what else can we talk about each week?

I think it is important that we don't just "speak for the sake of speaking". We are bombarded with news 24/7. Every journalist and commentator looks for a new "story". And at times, this overtakes the reality of what is actually happening.

I overheard the financial news the other morning and there was a bit of a buzz--commodity prices were up, the Aussie dollar was up, and this was going to give the Australian share market a real boost.

When I looked at what had actually happened, it wasn't all that much. But in this day and age of constant financial news coverage there is always the need for a catchy headline.

Human beings don't particularly like change, but they can also grow impatient and bored if things stay exactly the same. But boredom and impatience can lessen our alertness.

We crave some sort of action, and at times we can actually see things that are not there. In the investment world we are always looking for answers or opportunities. We want something, anything, to give us some guidance.

Unfortunately, the market doesn't really concern itself with what we want or need; it does its own thing. I have said before the US equity market will reveal its hand when it is good and ready. Nothing will change that.

If pushed for a view I would suggest risk is to the downside, but I think that is the most anticipated view--and rarely does the market do what the majority expect.

So we start another week waiting for some guidance. However, it is important to understand, and it probably goes without saying, that the outlook for both the US market and the Australian market, from an index point of view, is not really a reflection of the opportunities or risks in individual stocks.

There are some small stocks in the Australian market that have very encouraging charts. Some of the larger stocks also present opportunities at current levels.

And stocks like Bellamy's (ASX: BAL) and The A2 Milk Company (ASX: A2M), which peaked on 30 December, after a brilliant run in 2015, have worked off their previous overbought condition. They are once again trading above an improving 200DMA.

Blackmores Limited (ASX: BKL) was another darling of 2015; it also peaked on 30 December when there was an abrupt change in sentiment.

Unfortunately, unlike A2 Milk and Bellamy's, it is not displaying a marked improvement in the price action. The stock is on support and downside momentum has abated. It is on the radar and worth monitoring at current levels.

 

Chart Packs

Use the links below to view the various chart packs.


Global equities     |      Australian equities     |      Commodities

 

Global equities

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Australian equities

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Commodities

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More from Morningstar

• All quiet on the technical front

• Further downside in the gold price is likely

 

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.