Materials and Financials pulling in opposite directions

The All Ordinaries Index recovered during the week ending 17 May 2019, and was up 1.05%, ending 5.6% above its 200 DMA and once again in a position to test resistance at 6,460.

Of the 491 stocks currently comprising the index (and for which we collect data), 294 of these (60%) ended the week above their respective 100 DMAs, stable on the figure recorded at the end of last week. Three hundred and eleven stocks were up for the week, while 180 ended the week flat or down. Two hundred and forty-five shares finished the week within 20% of their 52-week highs, with 101 of those within 5% of 52-week highs.

The number of stocks within 5% of new highs has been stable between 60 and 70 for some months — the jump to 101 is notable. More stocks making new highs is a very positive sign for the strength of the overall market and an indication of where we might be in the cycle.

The two heavyweight sectors of the ASX including Financials and Materials, pulled the index in opposite directions during the week, with the Financials sector down 4.07% and the Materials sector up 4.87% for the week. These two sectors combined account for 45% of the total market, with Financials accounting for 27% and Materials accounting for 18%.

Drilling down further reveals that the largest capitalisation stocks in each sector including the big four banks plus Macquarie Group (MQG) in the Financials sector and the big two minors including BHP and RIO have a significant bearing on the movement of the index. These groups of stocks act as a barometer for the strength of the Australia economy and are incredibly essential sectors for both the economy and the stock market.

Last week the Materials sector rallied strongly, which followed the second test of support of the breakout from the trading range in February 2019. This pattern of breakout followed by numerous tests of support bodes well for the strength of the Materials sector.

On the opposite end of the spectrum last week, was the Financials sector, which was the worst performing sector for the week returning negative 4.07%.

We are writing this note on Monday morning, following the surprise election result which returned the Liberal Nations to government and we can already see the effect this is having on the Financials sector. The sector is up firmly for the day, erasing all of last week’s losses, led by substantial gains in the big four banks. These gains are favourable for the Financials sector as this has allowed it to reclaim its upward sloping trendline, which it had penetrated last week.

If we look at the charts of each of the big four banks, including Commonwealth Bank (CBA), Westpac (WBC), ANZ (ANZ) and National Australia Bank (NAB), we see that following the results of the election and the price action today, these stocks are starting to show signs of accumulation. Time will tell, and the sector indeed is facing some headwinds. However, ultimately, we believe that the stock market tends to move in advance of fundamentals as expectation of the future begin to shift, and this might slowly be starting to happen in the banking stocks.

Commonwealth Bank (CBA)

Last week the stock moved back toward the bottom of its intermediate term trading range. Today, the stock was able to break above this trading range today, showing a clear pattern of higher lows and higher highs. CBA is the largest of the big four banks, and this is a very positive sign for the stock and the sector.

Westpac (WBC)

Last week the stock closed on it’s first lower low since December 2018, warning that the downtrend that began in April 2017 might not be over. However today, the stock has again broken to the top of its intermediate term trading range. WBC is still trading below its 2016 lows, and a move above these lows would be a positive sign.

Australia and New Zealand Banking Group (ANZ)

The chart of ANZ is unusual in the sense that the lows of December 2018 did not go below the 2016 lows. The stock had been in a trading range for some months from June 2017 until October 2018. Today’s move brings the price back up to the bottom of this previous trading range, which has acted as resistance before, in February 2019. In which case, it will be interesting to see whether this resistance point continues to hold.

National Australia Bank (NAB)

Like CBA and WBC, NAB has been in a downtrend since April 2017. It is possible that December 2018 will prove to be the climactic stopping action that brings an end to this downtrend. Indeed, last week, this was not appearing to be the case as the stock respected the top of its downward sloping trend channel. However, with today’s move back into the resistance zone, and the resulting higher low, it is possible that the stock is showing signs of accumulation which could result in a new trading range forming.