Is it time to buy?

Lesley Beath | 09 Jun 2015

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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.


Overview

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).

NAB actually peaked ahead of the others, registering its recovery high in October 2009. From peak to trough the decline in NAB was 39 per cent.

You could mount an argument for comparing the current decline to that which occurred between May and June 2013, but in that instance the stocks remained above their 200DMA, so the situation was different.

As you can see, the latest rout is, at this stage, still marginally less than that which occurred between April and May 2010.

So, is it time to buy yet? I think that is a difficult call to make at this stage. The fact the banks were sold off so aggressively last week after showing some positive signs the week prior is a concern. It goes to show how quickly sentiment can change.

And with the All Ords now marginally below its 200DMA, it would be prudent to wait for some concrete evidence of a turnaround. The banks and the overall market need to bounce quickly to avoid the potential for further weakness over the next few months.

So far this year, the seasonal cycle has played out as it has done since 2010, with medium-term peaks in April or May. Regular readers will be familiar with the weekly chart of the All Ords with those peaks labelled. It remains a cause for concern.

So even if the banks can bounce from their respective support levels and the All Ords can reverse sharply this week, there is still reason to believe that the next few months will be choppy and volatile.

What about the resource stocks? Well, BHP Billiton (BHP) broke below its support level last week but both Rio Tinto (RIO) and Oil Search (OSH) are still holding. The ASX 100 Resources Index failed to push above resistance during the week, closing 4.7 per cent lower. The fall pushed the index back within the August 2014 downtrend.

The ASX 100 Resources Index paints a very different picture to the ASX 100 Industrials Index. The former is sitting not too far off its 2008 bear market lows, while the Industrials tested its 2007 all-time high in April/May. But the index posted a monthly "key reversal" in April.

The "key," coming as the all-time high was tested, is an important development and suggests that a peak of medium-term significance has been registered. The difference in performance in both these indices since September 2011 is stark.

The ASX Resources has outperformed the Industrials since mid-April but at this stage there are no real signs to suggest this rebound will lead to a major trend change. It could just be similar to previous short-term shifts in performance. But there are a couple of ratios that we can monitor.

Firstly, there is the ASX 100 Resources/ASX 100 Industrials, which would need to push decisively above the early-May highs. Secondly, we can watch the ASX 100 Resources/ASX Banks ratio, which needs to break above the 200DMA.

If those levels are overcome, the argument in favour of resource outperformance would strengthen.

To finish this week, let's see what is happening in the US market. Is it giving any clear guidance? Unfortunately not.

The S&P 500 is still holding above its major uptrend and the 200DMA is unthreatened at this time. The Dow Transports ended the week in the black but it remains below resistance. It needs to push above that resistance if the outlook is to improve.

The Dow Utilities has broken decisively to the downside. The NASDAQ continues to trade at the upper limits of its major trend channel. So there are still conflicting signals. There is nothing to suggest a change to the range trading that has persisted since the beginning of the year.

It should be an interesting week ahead for the Australian market. As it happens I am away for the next few weeks -- I often comment that whenever I take a holiday the markets seem to behave badly.

Sometimes it is equities, sometimes it is the currencies. I wonder which one it will be this time!

 

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This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

© 2017 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 content 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.