For any Aussie-based readers – here’s to a happy new financial year!
Fiscal year 16/17 is now behind us – I hope you had a good one. From a technical perspective – last year could not have been any better!
Most major markets trended beautifully – making it an easy one for most traders.
Unfortunately there’s no guarantee we will see a repeat for the next 12 months – so here’s hoping you capitalised.
During the week we talked to comments from former RBA board member – John Edwards – and his view we could see eight interest rate hikes for Australia within the next two years.
That’s a sharp move higher and I am sure Edward’s language would have put the “fear of god” into Australia speculators (eg home buyers)
Higher rates is not what they had in mind when they borrowed at least 3x their income to buy a small slice of the “Australian dream”.
However, my view is they shouldn’t worry too much in the near-term.
Longer-term is a different story but for the next 12-24 months – they should be fine.
You see, as far as the RBA goes – short-term rates are not going anywhere.
Now that doesn’t mean to say that commercial banks won’t start raising rates (due to what we see with bond markets).
For example, if bond prices continue to fall and their yields rise – then they will push up rates irrespective of what the RBA say and do.
But from our central banks’ perspective – they are caught between a rock and a hard place.
(a) the economy struggles to gain any sort of traction (more on why in a moment); and
(b) personal levels of debt (largely opposite housing) remain at record highs relative to our income.
Therefore, how can they raise rates without causing pain? Let me know…
Investment is the Key
As part of that post – I outlined three key elements if we are to see strong (sustained) economic growth in Australia over the coming years.
In no particular order:
- Greater disposable income (ie less debt)
- Higher wage growth; and
- Greater productive business investment (driving growth, jobs etc)
60% of our GDP is consumption based (sadly).
As such, unless levels of disposable income (and wages) improve – it’s hard to see how we will buy “more stuff” (that we typically don’t need).
My question to the folks at the RBA (or government) is what is it about this chart that tells us we are going to rocket back to 3% annualised GDP growth anytime soon?
After all, that’s what both the RBA and government budget is currently assuming.
What am I missing?
If my eyes are not deceiving me – it’s been 15 years since we have seen business investment this low.
And despite there being no financial crisis (that I am aware of) — and with rates never lower — investment levels are lower than the crisis of 2008!
As it happens – Elliot Clarke at Westpac – chimed in this week about the importance of investment in sustaining economic growth (when observing what we see in the US)
The importance of sustained investment in an economy cannot be understated. Done well, investment in real capacity begets greater production volume and employment as well as a productivity dividend.
Its absence in recent years is a key factor behind sustained soft wage inflation and the US economy’s inability to consistently grow at an above-trend pace despite the economy being at full-employment and household balance sheets having more than fully recovered post GFC.
Whether it be the US or Australia – the investment lessons / outcomes are the same.
This is a point we have made consistently over the past few years.
For example, the (growth) problem for the US is not so much full-employment — they have that — it’s what we see with productive investment.
My take is the previous administration lacked the policies to incentivise businesses to invest. If anything – they were discouraged.
The graph below highlights declining US investment in new equipment post GFC.
The good news is that investment is once again starting to pick up. It’s funny what the right incentives will do opposite human behaviour.
This is not rocket science… you have to “prime the pump” to get something out.
The previous administration wasn’t interested in priming the pump.
In fact, they were far more interested in what they could take from it (ie higher taxes etc).
Clearly this wasn’t working from an economic perspective.
And it’s why economic growth has gone nowhere for the better part of a decade (hence why I think there is untapped growth potential in the US – as much as $3T to GDP).
There are now moves afoot within Washington DC to suggest the pump will once again be primed.
However, not all of congress is aligned.
Getting financial reform through is going to be a tall order.
But one thing is certain – if businesses are not incentivised to invest and take risk with capital – they won’t. And why should they!
S&P 500: Weekly Close
The S&P 500 lost a bit of ground this week however this was expected.
Take a look at the chart below and our recent forecast:
We have been tracking this distribution for 19 weeks.
For those who are not familiar with how I construct distributions — it began on the 3rd of March when the index took a breath from a sharp run higher. After the S&P 500 found support at 2322 – this formed the basis of our structure.
From there, we are interested in three things:
(1) support and resistance at the bottom and top of structure respectively;
(2) the mid-point (ie where the bulls and bears will wrestle for control); and
(3) any move to the 61.8% to 76.4% zone outside the structure
For example, with respect to (3) — this is often where a move will exhaust itself (in the near-term).
If we look at the chart – you can see how I penciled in a move to this zone – and where I expected selling pressure.
And this is how things are playing out…
From here, don’t be surprised to see a move to the mid-point in the first instance (around 2350); before we see another likely move lower to the 35-week EMA.
I expect this to be a major level of support in any sell-off.
What’s most important is the weekly intermediate trend.
It’s bullish and has been for an incredible 66 weeks. As I said in the preface, it’s been a terrific year for both traders and investors.
We have a few golden (investing/trading) rules at tradethetape… one is don’t trade against the weekly intermediate trend.
And if you do… you should know that probabilities are not in your favour.
Trading with the trend the past 12+ months would have served you very well (especially given the additional dividends received). And yet how many negative (bearish) headlines have we been privy too during this time?
It’s pretty much relentless… week after week some article saying why the S&P 500 or Dow Jones is ready to collapse.
We are now 66 weeks and counting…
And whilst you may have taken partial profits – whilst implementing a trailing stop – you would still be in this trade long.
XJO Weekly Close
As we were saying last week – the 60+ week bullish intermediate trend in the XJO is starting to show signs of fatigue.
Sharp selling in the miners, energy and banking stocks are dragging the index lower.
For example, the weekly-MACD indicated selling pressure a few weeks ago.
We have also seen (expected) strong resistance at the 61.8% zone; and finally our (unique) sentiment indicator is flashing red (ie caution ahead).
And whilst our weekly trend is still bullish in the intermediate timeframe – we are finding good support at the 35-week EMA (a zone of 5700 – which we expected).
It’s important the XJO catches a bid in this zone – otherwise it will be a quick trip down to the mid-point of our distribution (ie 5400).
If we were to see this – then it’s likely the weekly trend will have finally exhausted itself.
Again, if you have been following my blog this year – you will have taken partial profits on this trade in zone I flagged (ie around 6,000). If you did this – you have substantially de-risked your position.
I would not be surprised to see the XJO roll over from here — especially given what we see with banks, increased regulation (tax) and the slowing housing market.
Remember: the XJO is very much influenced by only 4 stocks: CBA, ANZ, NAB and WBC (and why 90% of my investing is US-based). And at present, each of these stocks look to be under pressure.
Putting it All Together
All trends end.
However, the trading lesson is until we are shown evidence a trend has exhausted itself (eg the 10-week EMA moves back below the 35-week EMA) – we continue to remain with that trend – whilst applying prudent capital management (ie phased profits at set target and trailing stops).
This basic trading principle has seen us enjoy a great 12 months.
But markets don’t always trend as beautifully as they have done the past year.
For example, often they remain caught in difficult distributions (wrong footing traders).
Oil and gold have been two good recent examples.
We don’t pretend to know (or guess) what the next 12 months will look like for major equity markets. That’s a pointless (futile) exercise.
However, I can tell you we will most likely be on the right side of the trade.
We have shown this consistently the past few years and I suspect next year won’t be any different.
We maintain a very simple trading philosophy: take a position (long or short) only when probabilities favour you.
Stick to that and you will be better off than most other traders and/or investors.
… trade the tape
When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.