The Index closed another 1% higher last week. By historical standards market valuations are by no means excessive. Even so, many investors who bought in recent months now have significant profits to protect and are, understandably, becoming trigger happy. As the index tests technical resistance levels it continues to show signs that the rally may be losing short term momentum.
The uptrend remains intact and contained comfortably within the blue trend channel that began last November
However, we have now moved into the resistance zone marked by the 2 peaks in 2011. A peak in the near future would also be close enough to the projection of 61.8% of the flagpole height from the bottom of the pennant formation to add to the signifance of a turning point around here.
While the uptrend remains clearly intact, momentum indicators are worth watching for signs of weakness as we head into this resistance area
Price did flick below the very sensitive PSAR last week (dots on the chart below), only to move back above it.
We are also now in a position that could see a peak below the upper Bollinger Band following a peak outside it (arrow). If this happened it would be an indication of weakening momentum, made all the more interesting by the fact that it’s occurring at a resistance zone.
For reversal traders this would be a sell set up under the Bollinger Band strategy we often feature in the blog ( the opposite situation to the buy strategy on GBP:USD, I posted last week)
Valuation theme – Telstra dividend yield
In my last 2 outlook posts I’ve had a look at historical PE values for the index as a whole. These suggest that the market is not far above average valuations for the period leading up to 2007.
Given that we now have much lower interest rates, this may not be the time to be trading against the uptrend until there is a decent indication of weakness from oscillators or other technical tools.
Unless the market gets news that leads to a major reassesment of risks, the downward corrections could also be fairly limited as investors seek to take advantage of any weakness to reduce their exposure to cash.
This situation can also be seen in the table below which compares Telstra’s dividend yield to the 3 year bond yield.
Telstra has not changed its dividend since 2007. Its yield after taking account of franking benefits is currently about 5.6% above the 3 year bond yield. When it declared its dividend in August 2011, the yield was 8.8% above bonds. So the gap has narrowed as investors have chased yield, pushing the Telstra price higher over the past 18 months.
When it declared its dividend 6 years ago in February 2007, Telstra’s share price was about where it is now ($4.54 compared to $4.58 on announcement day last week). However, back then its fully franked yield was only 2.8% above the bond yield. So all things being equal, this market ‘darling’ for investors chasing yield could rally quite a bit further without getting to historically over the top valuations given the much lower returns now on offer from fixed interest investments.
Last weeks domestic data
The major releases on the Australian economy last week looked on the soft side to me. Over the last 6 months of data
- Job growth averaged only 6,500 per month compared to the 15,000 needed to employ the growing workforce
- Retail sales declined 1%pa seasonally adjusted to December
- There were 75,306 building approvals up 5.6% on the 71,267 approved in the 2nd half of 2011. This is heading in the right direction but still down on the 80,000 generally thought necessary to house the growing population
Given that we have fiscal tightening and a forecast reduction in mining investment these figures will need to improve if GDP growth is to meet current forecasts .
Maybe I’m just seeing things through the eyes of a financial markets employee but it does seem to me that perhaps it wasn’t until after Christmas that the confidence building impacts of rising share and property markets and the US fiscal cliff negotiations really started to impact on the consumer. In light of this theory, I was interested to see JB Hi Fi noting a good pick up in January sales when it reported today.
At this stage though, last week’s soft domestic data started to have its toll on the Aussie Dollar.
Aussie Dollar Daily Chart.
The decline in the Aussie Dollar picked up momentum when the RBA announced its rate decision last week. This showed a clear easing bias consistent with the softer data discussed above
Price has now stopped at the 200 day moving average which is tracking broadly sideways. This sideways movement in the average reflects the big picture sideways movement in the overall trend as the Aussie has remained confined to the large blue triangle formation in recent years.
Arriving back at the 200 day average means interesting times for the Aussie Dollar. A clear break below the sma by the currency could at this stage be a positive influence for the share market.