Is it time to buy?
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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.
What a week. After showing some glimpses of recovery at the end of May, the Australian equity market took a battering last week.
If you remember, the banks and some of the major ASX indices had held above support on 20 May and had bounced quite nicely. I noted that recovery in the last report but suggested there were still concerns regarding global equity markets, in particular the action in the Dow Transports and the Chinese market.
But the Transports ended the week higher. And after another rollercoaster ride on Thursday, the Shanghai Composite posted a 9 per cent gain on the week. So the markets that were concerning me performed well -- and the Australian market was one of the worst performers.
The All Ords declined by 4.7 per cent on the week. The banks were the hardest hit, down 6.4 per cent. The rout took the ASX Financials index below the combined support of its 200DMA and the 2014 highs.
But if we examine the weekly chart, the index is still holding above trendline support joining the June 2013, February 2014 and October 2014 lows. The uptrend from the 2011 lows comes in at slightly lower levels.
Australian and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (CBA) have broken major support, although in CBA's case the break is marginal at this stage. National Australia Bank (NAB) has also nudged below support, although at this stage it too is marginal. Westpac (WBC) is still above support.
Obviously they will not head in opposite directions so the question is whether or not ANZ's decisive break is a leading signal. We should get an answer relatively quickly.
If we look at the declines since their recent peaks, ANZ is down by 17 per cent, CBA 18 per cent, NAB 20 per cent and WBC 23 per cent. Let's compare that to the declines in 2010 and 2011.
From the 2010 high to the 2011 low, the ASX Banks index fell by 29 per cent. It was a grinding bear market but the beginning of the decline from April to May 2010 was sharp (as this most recent decline has been).
The April-May fall was followed by a rebound, ahead of the next leg down. So, I have compared that part of the decline as well as the full bear market. The results are as follows.
April 2010 to May 2010: ANZ (-24 per cent), CBA (-19 per cent), NAB (-23 per cent) and WBC (-28 per cent).
April 2010 to the bear market lows in 2011: ANZ (-33 per cent), CBA (-30 per cent), NAB (-32 per cent) and WBC (-39 per cent).