Rudi On Thursday

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

(This story was first published on Wednesday March 11, 2009. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere).

One swallow does not one summer make.

While the above is true, it is also clear that investors are readying themselves for the next upswing for equities. Call it a Bear Market rally, or a Sucker’s Rally, or whatever you like, but after more than six months of continuous disaster the global financial community wants to have a break-out from all the doom and gloom. And as I have been flagging over the weeks past, the odds are gradually shifting in favour of such a break-out to the upside.

US equity markets have only managed to post four days of gains out of the past 17 trading sessions. However, a trend can only reverse step by step and the Australian share market is now rising three days in a row.

As I pointed out in my Weekly Insights on Monday, it appears underlying sentiment towards crude oil prices is improving as well, while base metals seem all but eager to follow crude oil futures on their way (supposedly) to US$50 per barrel, if not US$55.

What else do we need? More favourable legislation? Obama staffers are working on reintroducing the now widely discussed uptick rule and on adjustments to mark-to-market accountancy requirements, which under current circumstances, continue feeding the negative loop for corporate balance sheets and capital requirements.

Nobody believes Citigroup has actually been making a profit during the first two months of this year, but maybe we don’t need internal Citigroup memos to remind us all that not every financial institution on the globe is destined for extinction?

Taken from this perspective, I found it remarkable that price charts for Commonwealth Bank ((CBA)) shares in Australia seem to be carving out what could be interpreted as a reverse head-and-shoulders formation.

For those who need some initiation on this: head-and-shoulders formations are amongst the most powerful indications on technical charts that a certain stock is heading for the abyss. Last year, at a time when many market experts were telling their clientele to sit tight and ride it out I pointed out charts for BHP Billiton ((BHP)) shares had carved out such a head-and-shoulders formation – after that they fell to $20.

A reverse head-and-shoulders formation indicates the complete opposite. If the pattern is confirmed, and Commonwealth Bank shares would need another two days of positive gains I’d reckon, technical analysis logic would indicate a rise into higher price levels should ensue.

This is also the view of the TechWizard, who first sent me an email today, followed up by a technical chart. The Wizard believes that a daily close -but most preferably a weekly close- above $30.35 would indicate CommBank shares have put a medium term bottom in place.

None of the other banking shares is currently displaying anything similar, and neither does the chart for the Australian Financials sector, but I can see the logic behind CommBank shares leading the pack forward. After all, that’s what sector leaders are supposed to do. On a similar note, BHP Billiton shares have rapidly surged above $30 again – talking about a fast return of risk appetite in the market!

Somewhat disconcertingly, however, is that one of the bullish chartists over the past few months, ABN Amro Morgans’ Daniel Goulding is reversing his previous bullish view for the Australian share market. In his latest Sextant newsletter, Goulding reports he is looking for the ASX/S&P200 to put in a temporary bottom at around 3050, preferably over the next week or so. After this the market can have its rally to 3800.

Says Goulding on Wednesday afternoon: “If the market can add another 100 points or so within the next few days before coming back down to 3050, my confidence will improve further.”

All well and good, but what about some solid fundamental reasons behind what’s happening?

Alas, there are none. We’re operating and observing from the heart of a protracted bear market. Amidst ultra-bearish economic and financial indicators and developments, there has been no convincing trend reversal in the all-encompassing doom and gloom grip yet on financial markets and on the psyche of investors and regulators. So all we have to work with is “relief”.

Or, as I put it in my presentation “Dealing With The Bear”;  Hope + Disappointment = Momentum.

From a fundamental point of view, I note the average price target on the FNArena website for CommBank shares currently stands at $31.14 – that’s less than 8% away from today’s closing share price. Similarly, the average target price for BHP Billiton shares now stands at $32.35 – a mere 5% further upstream following today’s above $30 return.

The worrying thing about average price targets for BHP Billiton remains that the trend is still very much down, as witnessed by Citi cutting its twelve month target to $28 today. I think it is only fair to say more targets will be lowered as analysts, similar to what Citi has done, will face the facts and lower their rather stretched looking price projections for crude oil this year.

We can all have our views on how far contract prices for coal and iron ore will decline this year, and at some stage we will find out, but oil prices averaging US$70-80 per barrel this year? Sorry, but I don’t see it happening given the overall economic environment.

How all this relates to this long anticipated relief rally, I am not sure yet, but my gutfeel tells me that my earlier calculation of a trading range between $26-34 for BHP Billiton shares very much remains in place. And why exactly should CommBank shares deserve to trade higher than $32? (Though admittedly, the current range in price targets is very much all over the shop).

For more details: see Stock Analysis on the website.

With these thoughts I leave you all this week,

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always firmly supported by Andrew, Greg, Chris, George, Grahame, Joyce and Pat)

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