Banks trying to bounce

The All Ordinaries index was up 3.4% for the week, ending 8 February 2018. The index ended the week 0.6% above its 200 DMA, finishing the week above the 200 DMA for the first time since October 2018.

Of the 476 stocks currently comprising the index, 230 of these (48%) ended the week above their respective 100 DMAs, up from 198 (42%) names at the end of last week.  Two hundred eighty-seven stocks were up for the week, while 189 ended the week flat or down. Two hundred and six shares finished the week within 20% of their 52-week highs, with 65 of those within 5% of highs.

The Real Estate sector continued to dominate the list of companies within 5% of new highs, accounting for 20 out of the total 65, representing 43% of the sector.    

This week cyclical stocks including Industrials, Consumer Discretionary and Financials lead the performance table, while Consumer Services, Materials and Information Technology were more muted.

The bounce in cyclical stocks, lead by the big banks but followed closely by the large Industrials including Building Products and Construction and Engineering industries as well as a host of bellwether consumer companies provided an exciting backdrop for the week.

We know that the stock market can represent a reliable leading indicator of the strength of the economy, in which case strong performance by crucial cyclical companies could herald a turning point, or it could just be a bounce within a continuing downtrend.

Financials

The big banks rose sharply following the release of the Royal Commission final report and resulted in the Financials sector as a whole logging its most active week since June 2018. The sector has been in what can only be described as a long term trading range with the high established in March 2015 and lows in February 2016, which were tested in December 2018.

The monthly chart shows the long-term trading range most clearly. Within this larger trading range, there have been numerous smaller ranges as the sector has struggled to establish a trend one way or the other.

The banks all but dominate the sector and the sector itself has significant influence over the direction of the overall index and the Australian economy in general.

Commonwealth Bank (CBA)  

CBA has threatened on numerous occasions in the last few weeks and months to break and hold below the February 2016 lows, which would potentially portend the beginning of a downtrend in the Australian economy. So far, each dip below support has been met with buying strong enough to push it back into the trading range, however with continually lower lows and lower highs since the last short term peak in April 2017, it would appear as if the CBA is still in the throws of a downtrend.

A move above $76 and back into the long-term trading range would be positive. However, this chart is far from looking healthy and still looks very much like a distribution with last week providing a last point of supply following the weakness of November and December 2018.

National Australia Bank (NAB)

The chart of NAB looks very similar to that of CBA. The stock has been in a downtrend since the last short term peak in April 2017. Long term support was established in February 2016 which was broken in November and December 2018.

The release of the Royal Commission final report which resulted in the resignation of the CEO and Chairman accompanied a move by the stock back into the long-term trading range. However, this might again be short-lived. A move back to the top of the downtrending channel would not be unexpected before sellers again begin to provide supply and demand weakens.

Westpac Banking (WBC)

WBCs chart looks worse than the other banks, with the stock trading well below February 2016 support in October 2018 and failing to make its way back into the trading range on the release of the RC final report. WBC has been in a clear downtrend since October 2017 and has yet to show any signs of strength. The massive volume during the week of December 17, 2018, could have provided a stopping action; however, this remains to be seen.

Australian and New Zealand Banking (ANZ)

ANZ has not moved below the support level established in February 2016. While this is a more positive picture than those provided by the charts of the other large banks, no clear direction has been established, and a test of December 2018 lows are likely.   

Key Takeaways for the Week

The All Ordinaries index is now back above its 200 DMA, which is a positive sign. However, the move last week was triggered mainly by the release of the Royal Commission final report, and it will be interesting to see whether the gains can be held and consolidated.

The fact that cyclical stocks lead the charge was constructive, however taking a closer look at these stocks reveals many in long-term trading ranges and therefore no real clues as to timing or direction of likely medium/ long-term trends. CBA also released H1 earnings during the week which showed an economy still doing well, however with risk to the downside.