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US charts versus fundamentals

Lesley Beath  |  26 Jul 2016Text size  Decrease  Increase  |  

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It's hard to understand new highs in the US market given the underlying fundamentals and the macroeconomic environment, technical analyst Lesley Beath says.

 

Many years ago, some chartists simply locked themselves in a room and studied the price of certain stocks or indices.

In that way they were removed from all fundamental data and all the latest news.

They claimed this was the best way to focus on what was going on with the price action.

As time evolved, the simple chartist morphed into the technical analyst, the latter using much more than simple price action to assess the market and its prospects.

At times, I think the chartist, who viewed the price action in isolation, may have found life a little easier.

For me, it is sometimes difficult to reconcile what the charts are saying, with what the fundamentals imply.

As I said last week, "the technical position of the Australian market appears more constructive than the fundamentals would suggest. That is often the case, and vice versa".

I think the same can be said for the US market.

Some, including myself, find it hard to understand new highs in the US market given the underlying fundamentals and the macroeconomic environment.

Years of loose monetary policy give cause for concern, at some time. But the S&P 500 and the Dow Jones Industrials sit at all-time highs.

From a technical perspective, the recent rise looks quite constructive. You must consider that it took 14 months for the S&P to break above its May 2015 high. That is a lengthy consolidation phase.

And if we were to view the charts in isolation, you would have to admit that it doesn't look too bad.

And if the Dow Transport Index can break above its April 2016 high, it would suggest its bear market was over.

While that is encouraging, the fly in the ointment at the moment is the low level of the VIX and the high level of "greed" on the CNN Fear and Greed Index.

Both sentiment indicators are suggesting a cautious stance is warranted. But the AAII Sentiment Survey paints a less worrying picture, with bullish sentiment still below its historical average.

You might remember that we looked at that sentiment survey back at the end of May and at the time the readings were in favour of higher levels in the S&P over a six and 12-month time horizon.

Although these sentiment gauges are somewhat conflicting, I think we need to accept that not every indicator is perfect. Also, they each may end up being correct, but on a different timeframe.

I think the near-term focus should be on the VIX, as it probes the lower limits of its recent range. The US T-Bond/S&P 500 ratio is not giving any clear guidance at this stage.

Let's see what happens to the S&P Banks Index as it pushes towards its 2015 downtrend and its 200DMA.

The top US banks stocks also face similar resistance, so the index is not being dominated by the action in any one stock.

Goldman Sachs, JP Morgan Chase, Citigroup and Wells Fargo exhibit the same price action. I think this is important to monitor. A topside break, if it occurred, would give an added boost to the US market.

Elsewhere, the resource-related markets of Brazil, Chile and Argentina ended the week higher again, cementing their recent topside breaks.

Copper was flat on the week, but nickel continued to strengthen.

China remains lacklustre.

When we looked at the All Ords in last week's report, the break above resistance was only marginal. The index added to that break during the week.

I also noted the ASX Banks Index was below its 2015 downtrend and suggested the outlook for the Australian market would improve dramatically if that downtrend was overcome. While the banks had a solid week, the downtrend remains intact.

I'd like to talk a little about that downtrend.

If we view the daily chart, the downtrend, which joins the highs of August 2015, December 2015 and May 2016, is clear. That downtrend coincides with the 200DMA.

So it is an important and strong resistance.

If we then take the weekly chart, you will see the downtrend from the March 2015 all-time high comes in at a different angle and does not join the same highs as the August 2015 downtrend.

You could argue the March 2015 downtrend is more important as it emanates from the all-time high. And if we look at that trend you might say it has already been broken.

However, as nice as it would be to believe that scenario, I do not think the trend is as clear-cut as the one on which I am focussing.

If we look at the individual banks, none have really broken topside so I think we must sit on the sidelines for now, waiting for a clear break.

ASX Health Care was the best performer on the ASX last week, followed closely by ASX Utilities. The strength in the latter pushed it above the 2007 highs, finally. Health Care broke above its May high.

Both sectors have outperformed significantly in recent years.

If we look at the relative-performance charts of both, there is some resistance near current levels.

For the ASX Health Care/All Ords ratio, it is the June high which has been overcome during intraday trading on Monday.

I think the break will hold. But the strength of further outperformance will be dependent on heavyweight CSL Limited (ASX: CSL).

The ratio chart of CSL/All Ords shows resistance from the January 2016 and June 2016 peaks. If that can be overcome it is likely to unleash another burst of significant outperformance for CSL.

Ramsay Health Care (ASX: RHC) has already broken to new highs in relative-performance terms.

ResMed (ASX: RMD) spent the past year or so in a broad range. It broke topside from that range in early July, completing a very lengthy consolidation phase.

The chart profiles of all three are constructive.

When we take the relative-performance chart of the ASX Utilities, there is also resistance. I think that resistance is more of a problem than that on the Health Care/All Ords ratio.

I won't talk about it now, rather I will present some charts later. They highlight resistance on the major components of the index.

A quick word on the ASX Materials index. As I noted last week, the index has broken through some hefty lateral resistance.

But at this stage the major downtrend is still intact. That downtrend has capped upside over the past week or so.

There is short-term support in place--as long as that holds the medium-term outlook is positive.

If that support fails I think we may see a period of consolidation. BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) show no signs of breaking above resistance at this stage so a topside break in the index is not indicated in the near term.

Lastly, a very brief comment on the currency markets. Basically, I expect further upside in the US dollar, which will put downward pressure on the Australian dollar.

I also expect, in the short term, weakness in the Australian dollar compared to its major peers.

 

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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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