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The reasons behind the declines from 5300 at the start of the year have been well covered, but when concerns around a RMB devaluation, a solvency issue in many European banks and growing worries about a US recession are in play, the Australian equity market is naturally going to get caught up in the malaise. The ASX financial sector clearly led the declines, but since 10 February traders have covered short positions with many initiating long positions in the sector and looking for a bounce.
In my opinion, the world is not as bad as feared and, looking at the valuations of the European and US banks, it seems many were pricing in a high probability of a credit recession. Positive news from JP Morgan, Deutsche and Commerzbank has certainly helped sentiment and the improvement in sentiment has fed through to the Australian banking sector, helped by a solid 1H16 earnings number from CBA. I suspect we could see further gains in the banks in the short term.
Earnings in general have been enough to support the Australia 200 as well and, with 30% of the market having reported, 56% have beaten consensus on earnings-per-share (EPS) and 68% on revenue. Earnings have fallen 16% from this time last year, but that was expected. Let’s see BHP’s numbers next week (see our preview),
as they could certainly help push the broader market towards 5000 if traders get clarity on their dividend policy and earnings outlook. Keep in mind that earnings still play second fiddle to macro-economic concerns, but as it stands earnings are not as bad as feared.
On a positive note, we are approaching the month of March and the prospect of new stimulus from the European Central Bank, Bank of Japan and a united stance from the G20 nations. China is unlikely to devalue its currency and that in itself should be taken positively by equity traders. Moves in oil remain key, though, and traders would want to see a realistic chance of production cuts from OPEC coming to fruition in the coming months for global equities to really push higher. This is the big unknown and why it’s difficult to believe the Australia 200 cash can push markedly through 5000.
Technically, the index is in a long-term downtrend and rallies (as it stands) look corrective in nature and thematic of a bear market. Whether one looks at a daily or weekly chart, we can see the trend is down and this still needs to be respected, throwing weight behind the idea that moves into 5000 would present themselves as a reason to look at shorts on the index. On a positive note, however, there is divergence playing through with price printing a lower low in February, but the oscillators (stochastic and RSI momentum) printing a higher low. This divergence often signals a reversal is on the cards.
Naturally, if the index breaks below 4750, then the short-term bullish stance will be mitigated, so this will shape my risk management.