Bank Rally Looking For A Peak

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

Bottom Line 13/02/13

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up

Technical Discussion

Any way you slice it the banks are rampaging higher as institutional investors chase yields. The lowering of interest rates by the US Federal Reserve over the last few years has enabled US markets rip higher to almost new all-time highs as investors move from cash into more risky assets. Australia on the other hand has been lagging considerably for a number of reasons, one of which has been its higher interest rates. With the recent rate cut domestically and ongoing rhetoric about a little more to come we're finally seeing equities play some catch up, although in broader terms the biggest upside gains have been restricted to a handful of safe dividend payers such as Telstra ((TLS)), Woolworths ((WOW)), Wesfarmers ((WES)) and of course the big banks led by Commonwealth ((CBA)).

Tonight's chart is a little different. It shows the big four banks gains in percentage terms from the major lows of March 2009. This is a percentage change chart and excludes dividends. Like the broader market the banking index is really a tale of 2-speeds, CBA and ANZ ((ANZ)) strongly leading,  with National ((NAB)) and Westpac ((WBC)) bringing up the rear. Media will have you believe the ASX was a strong performer last year but if you strip out the top 100 stocks, namely because they are the higher yielders, you also get two very different stories. The ASX-100 Accumulation index has increased in value by 27.9% since 1/1/2012, whereas the next 200 stocks that make up the Small Ordinaries only increased by 10.6% for the same period. During 2012 the Small Ordinaries also had a lot more volatility, making an intra-year low some 20% below its initial peak whereas the ASX-100 dipped about 10%. The last year has been a story of yield chasing and had you been out of those top 10 stocks, like the banks, then your returns will be somewhat different to what mainstream media is suggesting.

Back in his January 21st review Pete suggested that the Banking Index should move sharply toward the upper target of 6000 being new post-2007 highs. That level was attained last week and follow through has continued on back of today's CBA record profit announcement. Wave equality for the second corrective pattern stands slightly above current levels at 6154. His biggest concern was the ability to enter the index with a low risk pattern and he was spot on the money – the market almost moved in a straight line higher without the slightest hint of a minor pullback. On the very larger time frames, and being reiterated on these daily charts, is that this move higher remains a bear market bounce and not a new bull market. Yes, we may go higher, but longer term strength should not be sustainable.

Trading Strategy

If you hold banking stocks we suggest tightening up trailing stop losses, although we expect to continue to see upside until yields are lowered. At that time we should see broader market buying enter and drag up other areas of the ASX that have been lagging for the last year or two. We retain a very bullish stance for the remainder of 2013 with the All Ordinaries expected to move toward 5600. In the coming weeks we will be reviewing the very large picture via our limited edition Special Reports. The August 2011 Special Report positions remain in play.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

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