Inside the market

Consumer stocks an ominous sign for the economy

The All Ordinaries index finished the week ending January 25 up another 0.5%, taking the index above its 100 days moving average (DMA) for the first time since early October last year. The index also closed just 2% below its 200 DMA. Of the 474 stocks currently comprising the index, only 189 shares (40%) ended the week above their respective 100 DMAs. Two hundred forty-eight stocks were up for the week, while 226 names ended the week flat or down.

The index was able to hoist itself back into the trading range established during much of last year. This week will be crucial to see whether it can hold above the 5940 resistance level and push back up into the range, or whether this will turn out to be a last point of supply resulting in further distribution especially, as the index creeps closer to its 200 DMA.

Looking inside the market, we see that the dominant Financials, Materials and Healthcare sectors were the worst performers during the week, while the Energy, Consumer Discretionary and Information Technology sectors were the best performing sectors during the week.

Despite the rally in Consumer Discretionary stocks now completing its third consecutive week, it has not been enough to re-establish the uptrend, which is an ominous sign for the overall domestic economy.


Financials are in a clear downtrend and have been since peaking in May 2017. This downtrend only accelerated in October 2018 and has been driven to a considerable extent by the performance of the big banks – CBA, WBC, ANZ and NAB, which is an ominous sign for the domestic economy. It would be positive if the long term support level could hold at 5696. However, this is looking unlikely as the sector is again declining today.

Consumer Discretionary

Consumer Discretionary stocks have held up much better over the last few years than the financials. The sector has been in an uptrend since the beginning of 2015 trading within a well-established channel since then. However, it has now come under selling pressure beginning in September 2018, with the bottom of the trading channel penetrated in early November and now looks to be in distribution mode.

While the sector average is up nearly 10% from the December 24 low, it has so far failed to reclaim its 100 or 200 DMA or to move back into the up-trending channel which is another ominous sign for the domestic economy. Stock prices lead the economy, and in this case, another one of the critical cyclical sectors is showing signs of deterioration.

A look at some of the individual consumer names provides an even deeper insight.

Accent Group (AX1)

Former leader Accent Group (AX1) is now trading below its 100 and 200 DMA having broken below a clearly defined trading range in October 2018. In December a test was made of the bottom of this range and what was once a support zone has now become resistance for the stock, illustrating a definite change in behaviour.

Lovisa (LOV)

We see a similar picture in Lovisa (LOV). The stock began selling down below support in September and October last year. There was an equilibrium of buyers and sellers for a time at around the $10 level before sellers finally overwhelmed buyers forcing the stock quickly lower. It seems to be now trying to establish another trading range. However, it is too early to tell whether this is the case or whether the stock will continue to step lower.

JB Hi-Fi (JBH)

JB Hi-Fi (JBH) has been in a trading range since mid-es 2017, having been a reasonably profitable stock to own since the end of 2014. It is now starting to show signs that distribution is underway with a significant sign of weakness in December 2018, breaking below the bottom of the long-held trading range. The stock has since traded back up into the range, with a strong performance last week in concert with the rest of the sector however this might merely prove to be a final point of supply before further distribution unfolds.  

Harvey Norman (HVN)

The chart for Harvey Norman (HVN) looks remarkably similar to the chart above depicting JBH. However, for HVN the lower bounds of the range were penetrated much earlier, in April 2018. There is still some buying support around the $3.50 level. However just as we said regarding JBH, this might again prove to be a last point of supply before the stock trades lower, especially if the economy begins to show clear signs of deterioration.

Nick Scali (NCK)

Nick Scali (NCK) is another former leader that showed significant outperformance from late 2014 until it peaked in early 2017. Since then the stock has been in a very well defined trading range, the lower bounds of which were established in June 2017. The stock has been under substantial selling pressure since August 2018 with a significant sign of weakness in October 2018 when the stock broke below support on heavy volume.

The strength shown last week was on low volume, and it remains to be seen whether there is enough demand at these levels to provide the stopping action required to create a new support zone.

A point on value

JBH, NCK, AX1 and HVN are all among the cheapest quintile of stocks in the index, as calculated by a composite of value measures. While this does give us an indication of the level of pessimism surrounding the sector, it’s important to note that these valuation metrics are measures of past fundamental performance. The share price action of these consumer companies, especially the retailers does not bode well for earnings going forward, especially over the critical December period.

Similarly, though not quite as stark, the large banking stocks are also showing up at the cheap end of the value spectrum.

Cyclical stocks leading the economy?

We contend that in many instances, the stock market leads the economy. Banks and retailers are cyclical industries and the weakness of these stocks (last week notwithstanding in Consumer Discretionary stocks), cannot be ignored, especially as it hints at the strength (or in this case weakness) of the overall economy.

By Danny Sandler

Founder of Ocean Asset Management.