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Tipping points in markets

To create a tipping point, the rule is for a small change to have a big impact.

Chart
Source: Bloomberg

Several events in 2016 like Brexit and the election of Donald Trump could hardly be called small, however one small change in US interest rates has changed the world.

Donald Trump gave the world an early Christmas present by way of volatility in the equities and the FX markets, and suddenly the world could see direction following the Republicans taking control of both the Senate and the House of Representatives.

From a trader’s perspective, could this drive the markets higher? 
Such large upward and directional gains as we have witnessed in the past five weeks are often met with some form of corrective move as profits are locked in.  
And here we are, just before the holiday period, at a tipping point of a full-on bull market in commodities, US dollar denominated FX and global equities, especially financials, looking for the inflection point in bond markets that would allow wider margin spreads for the balance sheet bottom line. Banks are now raising interest on investment loan books.

And then we have asset inflation to increase the equity-to-debt value paper wealth.

If you have recently purchased a property, the debt-to-equity spread is a minimum 20%. For apartment buyers in Australia, this spread may have widened to 100% if you purchased over four years ago, meaning your asset portion of the purchase has doubled. Off-the-plan buyers in 2012 Sydney have seen the equity portion of the property purchase increase two fold and more.

This chart highlights stock oversupply being a factor in 2017. The last time housing stock became ‘oversupplied’ was in 2003, just prior to the 2003 – 2007 bull market.

As the property market moves from growth to flat or lower growth on oversupply, profits can be realised and deployed into other investments like the equities market. Bond market yields are rising, making the funding of the investment more expensive. Index-following fund managers have received an average 5% gift in the five 5 weeks. This article discusses the already-established bull market signal in US equities.

Consensus earnings-per-share (EPS) growth sitting at 11% year-on-year looks set to extend over 5% in the coming 12 months to 11.6%.

For the retail investor, dividends reinvested into the market has returned 12.63% over 2016.
In 2017, with upgrades expected, earnings per share is expected to grow 5.48% with forward PE (price-to-earnings) ratios to move slightly lower from 16.25% to 15.41%. The numbers are going in the right direction to hold support in the equities markets for 2017.

From a technical trading perspective, the market currently sits at an equal top of 5600 points, following an ABC corrective move in this current range between 5040 and 5600. Three spike lows are now shown, with three the important signal in consolidation chart patterns. A breakout above this level would find resistance at 5725 the August 2015 highs. Any retracement would be keenly watched to hold the 5600 level expecting a technical support level to hold.

ASX 200
Click to enlarge

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