Australian Investment Blog

Is this the beginning of the end for Australian stocks?

After an aggressive last few days selling, August has managed to live up to its reputation as a weak month for stocks, with the ASX200 falling 2.3% for the month while the S&P500 was down only 0.1%. Today will be interesting to see if our market can produce its characteristic strong start to the month. On the 1st of August the market rallied almost 50-points early in the day, to create the top that was never breached at 5611 - remember the "DOT Theory".

In last Monday’s Morning Report we said that we would be watching the "ABC retracement target" very closely - that time has now arrived with the SPI likely to be just under that level this morning. We get a strong bullish signal if the SPI can break back over 5435 which is where we were trading ~10.20am yesterday - we use the SPI on shorter timeframe analysis as it discounts for dividends.

Importantly for our short-term bullish view the ASX200 needs to hold the 5400 area.

September Share Price Index (SPI) 60-minute Chart

Overnight even though the major US indices all closed in the red their Banking Index again managed to make small gains to close up a very impressive 7% for the month. Unfortunately, the Australian equivalent only managed to rally 0.3% for the month which is still not a bad effort in an overall weak market (~ 2% outperformance)

The banking sector remains our favourite place to be at present.

US S&P500 Banking Index Monthly Chart

Yesterday we mentioned BHP as one of the 5 stocks that we did not want to own at current prices - today it looks set to open under $20, a rapid $1.10 (5%) decline. This week investors have taken the hammer to resource / gold stocks after comments from Jackson Hole last weekend implied interest rates may rise sooner rather than later in the US. This selling pressure makes sense but the Australian market seems yet again to be the worst performer on any good, or bad, news e.g. The Canadian market closed marginally higher last month and the $US Index is only up 0.47% for the week.

The aggressive selling we've experienced implies strongly that investors have simply been caught long in the crowded resource trade.

BHP Billiton (BHP) Weekly Chart

Gold has fallen around 5% from its highs in July but the gold stocks have been savaged e.g. Newcrest (NCM) -19.9% and Regis Resources (RRL) -14.4%.

This is clearly another illustration that investors / traders were long the gold sector and are suffering some pain. We identified buy levels for NCM at $21.20 and RRL at $3.50, these are approaching fast hence we may consider switching another holding to these stock (s) at identified levels.

**Watch for alerts**

Newcrest Mining (NCM) Monthly Chart

Yesterday's large volume was a major concern to the health of our overall market. The recent reporting season was average and Estia Health's (EHE) debacle was enough to put people off stocks for life; shouldn't age care be a growing exciting space? Today's price action will be very interesting but it’s hard at present to see where any major support will come from, with exception hopefully of the banks.

Summary

• We remain short-term positive local equities but the 5400 area needs to hold for this view to be maintained.
• We maintain our buy targets for NCM and RRL, these are ~4-5% lower.

Overnight Market Matters Wrap

• The US share markets were weaker last night, dragged down by falling oil prices and investors waiting for Friday’s job numbers. The Dow closed down 53 points (-0.3%) at 18,401, whilst the broader S&P500 finished down 5 points (-0.2%) to 2,171.
• For the month of August, the Dow finished down 31 points (-0.2%) and the S&P500 finished down just 3 points (-0.1%).
• Oil had a trifecta of bearish news, with stockpiles of crude reported to have increased by an unexpected 2.3m barrels – analysts expected 921k barrels. Distillate (diesel and heating oil) increased by 1.5m and gasoline, although it decreased by 690K barrels, it was only half of the expected number. Crude finished down US$1.49 (-3.2%) to US$44.86/bbl.
• Gold fell on an expectation that the jobs number would be better than expected, closing on a two-month low at US$1,308/oz, down US$4.60 (-3.2%).
• The ASX 200 is expected to open weaker this morning, testing the 5,400 level as indicated by the September SPI Futures this morning.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 1/09/2016. 9:00AM.

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