Rudi’s View: The Return Of The Bank Stocks Market Indicator

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Rudi Filapek-Vandyck, Editor FNArena

Long standing readers of my market analyses no doubt remember I used to have my own private, never-fail market indicator prior to the Big Bear Market sell-down of 2008-2009: the gap between prices of banking shares and consensus price targets.

Without going into any details about why and how, here's how it used to work: share prices for the Big Four in Australia would close the gap with consensus price targets and often move a little beyond these targets. I would subsequently warn a pull back is near. Next thing you know the share market (not just the banks) is retreating to a lower level.

For obvious reasons, this indicator only works as long as securities analysts are ahead of the curve, not when they're playing catch-up as they have been forced to do since mid-2007 (when most of them initially dismissed subprime as a small problem in a far too large world to ever matter).

I think the time of analysts still having to catch up probably ended sometime in the past six months. Does this now mean that my old indicator is back?

I note among widespread talk about the sharemarket looking “toppy”, “ready for a pull-back”, “expensive”, “tired” and more of similar labels being used this week, that out of Australia's Big Four banks only National ((NAB)) still has a sizeable gap to close with the consensus price target of $31.17.

But then again, NAB shares have been the clear laggards since late last year in the sector. ANZ Bank ((ANZ)) shares, on the other hand, have been the outperformer over the past three months and yesterday they closed at some 3.5% of the consensus price target of $26.41.

On the other hand, shares of the two other members of the Big Four Club, Westpac ((WBC)) and CommBank ((CBA)) closed at a much smaller distance from their consensus targets yesterday.

If history is any guide this would indicate investors have pushed the share market closer to fully valued territory, but not yet to excessive price levels. There is still some room to lift a little higher, though this does not mean we cannot start a pull-back from yesterday's levels already.

After all, we're close to clear valuation limits for about a quarter of the share market in terms of market capitalisation and index weight.

Such observation would be in line with UBS's reading of global risk appetite earlier this week – see yesterday's story “Rudi's View: Up, Up, Up… Until We Drop”.

There's one caveat: within weeks three of the Big Four will report their interim results. There's always a chance these results will surprise to the upside and analysts will be forced to lift earnings forecasts and price targets.

But what are the chances after the many and significant earnings forecast upgrades from the past twelve months?

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.

P.S. II – The consensus price targets in the table above differ a little from those on display in Stock Analysis on the FNArena website due to the inclusion of GSJB Were.

Click to view our Glossary of Financial Terms