Is it time for the Aussie market to finally put in a decent rally? To break out of its sideways funk and move to new, multi-year highs?
Yesterday’s strong bounce off support gives credence to that view. While it’s early days, and another setback could occur at any time, you have to happy with the market’s recent resilience.
Take a look at the chart below to see what I mean. It shows the ASX 200 over the past year.
As you can see, the market peaked in May. After a brief correction, it has moved sideways for the past four months. But every time it fell near or below 5,650 points, buying support came in.
[Click to open new window]
The same occurred last week. Tentative buying supported the market before yesterday’s strong performance. Add on another decent expected showing today (not reflected in the above chart) and you have a market that looks a lot healthier than it did this time last week.
The next challenge will be for stocks to break above 5,800, which has acted as resistance for the past few months. If it can do that, I think you’ll see a pretty quick move to major resistance at 6,000 points.
For a major move higher, though, you really need to see the banks join in. Will that happen?
There are two ways to think about it.
The first way is how most people do it. That is, they start off with ‘I think’.
Unless you are a bank analyst covering the sector comprehensively, that’s the wrong way to go.
And even if you are a bank analyst covering the sector comprehensively, it’s probably the wrong way to go. Except that you’re paid very well to start off with ‘I think’. People want to know what you think, so they can think the same.
What’s the problem with such an approach?
Put simply, financial markets are way too complex for any of us to understand. Even specific sectors like banks are incredibly complex. On the surface they are easy enough to get your head around.
But there are complex competition, technology and regulatory threats that are ever present. And you have to read the macro environment correctly too. Most people can’t do that consistently, because their view of the Aussie economy is biased by preconceptions and notions of how they think the economy should be, rather than what it is.
And finally, you have to consider what everyone else thinks. You may believe that the banks are a good buy, but if no one agrees with you, you’re not going to make money from the idea.
This is a fundamental point that many ‘contrarian’ investors don’t consider. It’s all well and good to look where no one else is looking to find the ‘unloved’ stock or sector. But if it remains unloved then it’s not much use to you.
You absolutely need the crowd to agree with you at some point to make decent money in the market. The trick is to get the timing right. So you get in early, but not so early that you could be waiting around for a year or more for everyone to see what you see.
In my experience, an effective way to achieve all this is not to start with ‘I think’, but rather start with ‘what does everyone else think?’
This may sound like a strange form of outsourcing, but bear with me. All you’re doing in asking that question is consulting the charts. If you can read a chart effectively, you have the ability to get an insight into what everyone else is thinking.
Note I said ‘get an insight’. Not ‘understand completely’. When it comes to markets, you’re trying to work out the future, which is unknowable. The best you can do is gain insights from the charts and go from there.
So, getting back to the banks, what insights can we gain from a chart of the banking sector? Let’s have a look…
[Click to open new window]
As you can see, the banks corrected heavily in May, before recovering slightly. They sold off again in August and September on the back of the Commonwealth Bank [AX:CBA] money laundering scandal.
But the sell-off found support at the June lows. That indicates the worst might be over for the sector. Yesterday’s move higher was another positive. Upward momentum looks to be returning to the sector.
If this continues — and the signs are positive — then the Aussie market (as measured by the ASX 200) should indeed move higher in the coming weeks. And you just might see it break through the elusive 6,000 point barrier.
If it can do that, it will be a decisive victory for the bulls.
Editor, Crisis & Opportunity