Watch for red screens in November for ASX

Reading the moves on the market yesterday I was struck by how limited the moves really were and the tepidness of volumes throughout the entire market.

I see a lot of market commentators talking about the market heading back to the 2007 highs, with the global equity space continuing to cash in on the money printing from the Fed; the ECB’s new round of LTRO loans as it looks to expand its balance sheet again. However, private European banks are not really that interested and are actually paying back he loans faster than expected and the RBA’s mulling on the high AUD. All are programs designed to support growth which is why commentators the world over see price strength in the near term and through too Christmas.

I, however, am getting to the point where the fundamentals are not backing this call and after four very strong very bullish months see a pullback on the cards as institutions and fund manager start to eye total returns and profits as their investment metrics start to scream ‘overbought’ and ‘overpriced’.

I called a crest on the market at the start of the week, I believed the banks would be the driver for a rally up to 5426 and that has been the case the ANZ results were bumper and Tuesday saw WBC, ANZ and CBA reaching record highs.

However, what made me hestitate was the turnover in October; only $75 billion changed hands last months compared to the month average of $88 billion which is the second lowest volume turnover of the year behind January (which is always the slowest month of the year due to seasonality).

The fact that NAB and WBC fell and are falling into their results suggests the institutions don’t see price backing the record earnings the banks are reporting. They have been the best total return on the market over the past 24 months and have be bid up on the income they provide along with the relativity safe earnings they produce.

However, the price to earnings expansion of the last four months gives me reason to believe profit-taking is coming in November. The rally is running out of support in the short term and the fact the technical level of 5426 hasn’t been clearly broken gives me even more reason to believe a pause is coming. I think it will be a short three to four week pull back as the banks turn ex-dividend and money managers assess where their next total return is coming from. Don’t be surprised to see the ASX back into mid-5300 come mid-November.

Don’t get me wrong, come December – when approximately $13.7 billion in dividends are returned to the shareholders from ANZ, NAB and WBC – support will return pretty quickly before Christmas as people set-and-forget for a month or so. I see this as another reversal sign heading into first half reporting season in February when we will get more conformation that P/E expansion isn’t supportive. The market will rally back to the five-year highs it is currently sitting at, I just need to see a healthy pullback to believe the bull market is being supported on fundamental metrics rather than just hot money from central banks.

So I reiterate what I have been saying for the last week or so, from Melbourne Cup onwards the market is in for some cherry red screens.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 up nine points to 5435 (+0.16%) on the back of mild trading in the US and Europe to finish the month. The US futures were pointing to a positive night in after-market trading which could also be a reason for positive call. BHP’s ADR is suggesting the stock could slide 29 cents to $37.37 (-0.77%) having popped up in yesterday trade.  

However, BHP, RIO and the rest of the material space will be governed by China today. The release if the official PMI index at noon and the final HSBC PMI data at 12:45 AEDST will be highly influential on this space and the AUD. If it’s a positive print expect this call to reverse and more questions asked of the RBA in its statement on Tuesday; will it need to act on the high AUD?

It is Friday and the start of a new month so expect volumes to be low as managers finish up paper work for the close of another month and investors look to position ahead of the weekend and a shortened week for Victorians. It will be a mild day of trade today.

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