Australian Investment Blog

Remain open-minded during times of worry

The US Tech stocks led the strong gains overnight with the NASDAQ advancing over 1.5%, which itself was led by APPLE. We have often voiced our opinion that the NASDAQ leads the US stock market and if this again proves to be correct, the current mass "Doom & Gloom" stock market commentators may be wrong, or at least premature. Amazingly, the NASDAQ is now only 0.37% below its all-time high - this index doesn't currently sound too bearish. We remain bullish the NASDAQ, initially targeting the 5000-5200 region ~ 6% higher - we turn bearish under 4620, which is now 4% away.

In Wednesday's report, we discussed the high levels of cash being held by many investors. We have to question whether markets roll over when everyone's talking about a fall, plus actually sitting on cash hoping for it. Perhaps we are going to experience a "sell on rumour, buy on fact" market reaction to the Fed and BOJ meetings next week. Markets may only be factoring in a 22% chance of a rate rise by the Fed, but the uncertainty is usually the larger concern.

We think that US indices may be throwing out a warning of what is around the corner, as opposed to the event actually unwinding before our eyes e.g. The Dow fell 10.5% in mid-87, before rallying to make fresh highs, then collapsing 41% later in the year.

NASDAQ Monthly Chart



Unfortunately, the NASDAQ is not a particularly great indicator for our own ASX200, which is down 1% in 2016 compared to the NASDAQ being 4.9% higher over the same period. The main comfort we can take at this stage is it’s unlikely that the local market will accelerate lower if US stocks remain firm, or actually make fresh all-time highs.

We stick with our opinion that the ASX200 has formed a major top at 5611 and we will be looking to increase our own cash position into strength, ideally over 5275 basis the ASX200. On a technical level, this negative view requires a break of 5375 to switch us to a neutral stance.

ASX200 Daily Chart



The standout in our local market yesterday was our pet at the moment - the banking sector. The local banking sector is currently performing very well on a relative basis e.g. the ASX200 is down 5.3% over the last month, but NAB is down 0.96% and Westpac 1.3%. Not surprisingly, CBA and Bendigo have corrected further, but they have both recently paid significant dividends.

Seasonally, we are entering an extremely strong period for the local banking sector, which makes sense with ANZ, NAB and WBC paying large dividends in November and then the "Christmas Rally" just around the corner. The banking sector is not the area where we anticipate reducing our market exposure.

Australian Banks Seasonal Weekly Chart



Also, the US Banking Index remains positive on a technical basis, but it needs to follow the NASDAQ towards fresh September highs to become exciting i.e. over 3% higher. Fundamentally, higher interest rates are good for banks profitability.

US S&P500 Banking Index Monthly Chart



Summary

• We intend reducing our market exposure into strength around the 5275 area, but it's unlikely the banks will be in sell sights.

Overnight Market Matters Wrap

• The US share market rallied from its recent lows overnight, with the strength of Crude Oil being one of the culprits for the broad rally, along with Apple shares pushing the NASDAQ to outperform the broader market.
• The Dow closed 178 points higher (+1%) at 18,212, while the S&P 500 ended 21 points higher (+1%) to 2,147.
• Oil advanced little from the bottom of its snakes and ladders game, up 0.8% to US$43.91/bbl., after a restart of a pipeline to New York Harbor was delayed.
• BHP looks to outperform the broader market today, after ending its session up an equivalent of 1.4% to $20.35 in the US.
• The December SPI Futures is indicating the ASX 200 to open 40 points higher, around the 5,280 level 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 16/09/2016. 9:00AM.

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