Rudi's View | Nov 22 2017
In this week's Weekly Insights (published in two separate parts):
-Equities Bull Market: It's Raining Warnings
-Commodities And A Greener China
-Conviction Calls: Goldman Sachs, Ord Minnett, Bell Potter, CLSA, And Morgans
-Predicting December Index Changes
-Matt Barrie's Manifesto
-IPOs In September Quarter
-Rudi On BoardRoom.Media
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appear in part two on the website on Thursday]
Equities Bull Market: It's Raining Warnings
By Rudi Filapek-Vandyck, Editor FNArena
One of old share market truths that likely best describes present conditions is that a bull market makes heroes and geniuses out of all of us.
Certainly, making money in the local share market has never seemed easier with plenty of stocks rallying by 10% or more in only a brief period. Every day it seems all that is required is a positive announcement by or about a company to have share prices responding with a double digit percentage rally on the day.
Consider that Beach Energy shares are up nearly 75% since September, and so is Blackmores. a2 Milk shares are up 257% over the past twelve months; 55% in the past three months. Syrah Resources and Santos are not far behind on a three month glance into the past, and the same can be said of Altium, Platinum Asset Management and Bellamy's.
On Friday, Nick Radge, better known as The Chartist, whose technical analysis is sometimes shared with investors through FNArena, joked on Twitter about the next bear market surely being ready to soon announce itself. What triggered the unexpected references to the dreaded bear is the ease with which Radge's trend following strategies continue to accumulate further gains.
Radge can look back upon market experience of more than two decades, I estimate, and he knows first hand when things get this easy, they usually don't last long.
Surely tougher times are about to announce themselves?
Another battle-hardened market trader, Dennis Gartman, with more than five decades of day-to-day experience under his belt, made no jokes whatsoever when he announced last week the next bear market is taking shape right here, right now.
Gartman reminded all investors that when share prices only seem to go up, and economies are firing on multiple cylinders, and labor markets are tight, interest rates low, central banks still stimulating and it appears there is nothing on the horizon that can possibly derail the ongoing uptrend for equities, that's exactly when the seeds for the next bear market are being planted.
Gartman was on my observation and according to my memory one of the very first to warn about a developing bear market in mid-2007.
His gripe today is that all major equity indices around the world are breaking through well-defined trend lines, and they are doing so on solid volumes. The chart below, taken from The Gartman Letter last week, shows the Euro Stoxx 50 index as a prime example, but by now a similar observation can be made about US indices, including the market leading Nasdaq.
[Source: Gartman Letter]
Drawing trend lines on price charts is an old chartist technique which I oft practice myself. Prices breaking through trend lines to the downside doesn't mean they cannot continue moving higher for a while, but if/when they stay on the southern side of the trend line, it becomes more likely price will seek for support at some stage, and there is none underneath.
What triggered Gartman's attention is the large number of leading global equity indices all breaking through trend support in short succession of each other. It suggests, explains Gartman, a major reversal in underlying trend is likely upon us.
None of this guarantees global equities are about to fall into the abyss, but Gartman regardless is now short US equities.
The picture described above wouldn't be complete without adding Gartman made a similar observation in June this year. He had also been bearish in 2015 and during the first months of 2016.
Putting more weight into the balance, probably, is the fact that previously bullish market strategists at Canada's Canaccord Genuity are now also warning the US share market might be due for a retreat. On their observation, implied equity risk premium (valuation of equities vis-a-vis government bonds) is again approaching 3% and history suggests this is as far as the premium can shrink.
Market breadth in the US is deteriorating rapidly, notes Canaccord Genuity. If the S&P500 were an equal-weighted index adjusted for market caps, a downtrend would already have become visible on price charts. See chart below.
Canaccord's observation implies a declining number of influential market leading stocks is keeping the global bull market alive, but underneath the surface a trend reversal might already be playing out.
The equal-to-cap-weighted version of the S&P500 has now broken through the 2012-2016 trend line, report the strategists. They point out a similar "technical violation" was observed prior to the last bear market, in 2007.
For now, Canaccord Genuity stays slightly Underweight US equities and Marketweight Canadian equities, but the strategists state their next move will be dependent on how market breadth evolves from here.
Closer to home, Martin Crabb, CIO at Shaw and Partners, moved to a negative view on Australian equities on November 13th. His conclusion:"Stocks look expensive and it is a lack of risk premium that is driving valuations, not growth".
On Crabb's observation, which was near the ASX200's highest point for the year, Australian equities on average are valued one standard deviation above the long term average and projected return for the year ahead would be similar to the implied forward dividend yield (implies no net capital gain).
All this against a background of lack of earnings growth in the domestic market other than, potentially, for resources stocks. Crabb called the market overall a Sell and has been proved correct thus far. Though one has to add: nothing too dramatically has developed over the week past.
If anything, recent sessions both in Australia as well as in the US suggest buying interest picks up when share prices drop.
Also, the lack of earnings growth in Australia seems to apply more to the top end, as also shown in this week's update on stockbroker ratings, price targets and profit forecasts (see website, story published each week on Monday morning). But whereas out-of-season reporters such as REA Group, DuluxGroup and Incitec Pivot have forced analysts to lift their forecasts, revised price targets more often than not remain below current share prices. Last week saw analysts issuing twenty downgrades against only six upgrades in recommendations.
Clearly, if this share market wants to launch another attack at 6000 and beyond (ASX200), it will have to do so amidst rising headwinds from individual stock valuations.
Once upon a time I used to look at share prices of BHP and Rio Tinto and the Big Four banks to gauge where risk appetite is at, and what might be left in terms of further upside. This time around, there are few valid signals coming from these six market leaders.
CommBank shares are trading 2.3% above consensus target following a better-than-anticipated quarterly update which triggered a swift rally in the share price. Other banks, however, seem to be suffering sector specific headwinds and concerns, also because this month's bank reporting season was disappointing, with exception of CommBank.
BHP and Rio Tinto are trading well below consensus price targets, though Rio shares recently touched consensus target, and were instantly pushed back lower.
No additional market signals from the local market thus. I still think US equities will continue to show the way forward, any deterioration over there should be taken as a negative for the local market.