The Broad Range of Big-Cap Companies Fuelling the Recent Rally

It’s been a little frustrating to watch the major Australian index over the last few years.

In percentage terms, the S&P/ASX 200 Index [ASX:XJO] has held within the tightest range since it was formed back in 1992.

It was like watching paint dry during 2017 when the index stayed trapped in a 3.5% band for five months.

An index is driven by the component stocks that make it up. These are the so-called ‘internals’ whereby we can analyse individual stocks to find leaders and laggards.

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It’s a market of stocks

The late Harry D Schultz said, ‘It’s not a stock market, it’s a market of stocks.

Schultz was a great market commentator who wrote the International Harry Schultz Letter. He was also in the Guinness Book of Records as the world’s highest-paid investment adviser.

So what did he mean by his comment that it’s a market of stocks?

It’s fairly simple. Many stocks will flow with the tide of the general trend of the market. But some won’t. Each stock must be judged by its own character.

During a bull market when most issues are rising, some stocks won’t join the party. Instead they’ll fall and become part of their own little bear market. And when the general trend is rising, some will lead the way while others lag behind.

Each stock represents a company led by its board and senior executives. Aggressive leadership leads to different outcomes from more conservative types. Crucial decisions made by senior management have a direct impact on a company’s fortunes.

The ASX 200 index is made up of the 200 largest ASX-listed stocks. Together, they make up more than 80% of the capitalisation of the entire market. The index is weighted by market capitalisation so the bigger companies have a stronger impact on its value.

The S&P/ASX 200 index includes the largest of the big-cap stocks. Their combined weight makes up around 53% of the ASX 200 index. This is where to look in order to find the stocks that are driving the benchmark index.

In recent years, it wasn’t easy to find a decent group of strong leaders driving the index in a particular direction. This appears to have changed in the last couple of months. A scan of the individual stocks in the ASX 200 index shows a broad base of stocks that are doing well.

After slumping to 5,410 around Christmas time, the ASX 200 index climbed as much as 15.3% earlier in the week.

How the Big Four banks are driving the recovery

One of the factors driving the recovery is the performance of the Big Four banks. They have a significant impact on the ASX 200 index with a combined weight of 20.3% of its total capitalisation.

The big banks all fell for more than three and a half years after topping out in early 2015. This acted as a drag on the benchmark index. The recent recovery by the banks has stalled the drag and served to boost the market.

Each of the banks made an important low on 14 June last year. Let’s take a look at a relative comparison chart since then:

CBA, ANZ, WBC & NAB comparison chart

Source: Optuma

[Click to open in a new window]

All of the banks appear to have stopped falling for now. NAB and Westpac are still the laggards of the group and remain below the important low made last June.

CBA continues to lead the pack and the chart shows it in a strong position. ANZ has been the best performer since the low just before Christmas. After acting as a leader in the past, it was in the best position to play ‘catch up’ in a rebalance of portfolios.

The star performers are BHP Group Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO]. These mining giants have set an enviable pace. They stand to benefit from very strong iron ore prices and generally buoyant prices for other commodities.

Let’s take a look at another relative comparison chart:

BHP, Rio Tinto & XJO comparison chart

Source: Optuma

[Click to open in a new window]

This chart measures the performance of BHP and RIO against the benchmark index. The scale at the right is in percentage terms. The miners are both up more than 30% over the period and have shown particular strength since late November.

Elsewhere, Amcor Ltd [ASX:AMC] is up by 16.4% since late October and Brambles Ltd [ASX:BXB] is up by 38.2% since it bottomed out last June. It’s a little early to gauge Coles Group Ltd [ASX:COL] as it only listed in November after a spin-off.

Millionaire factory Macquarie Group Ltd [ASX:MQG] is up by 24.4% since Christmas and its share price is close to record levels.

Wesfarmers Ltd [ASX:WES] and especially Woolworths Group Ltd [ASX:WOW] are holding up after going ex-dividend for significant recent payouts to shareholders. Woodside Petroleum Ltd [ASX:WPL] also went ex-dividend for $1.275 in the last week, but it’s still up by 21.7% since Christmas.

Like the banks, Telstra Corp Ltd [ASX:TLS] has stopped falling and its chart shows signs of support. It was once Australia’s largest company, but now ranks ninth in size.

South32 Ltd [ASX:S32] is up by 30% in the last couple of months while Transurban Group Ltd [ASX:TCL] is up by 16.8% since its low in October.

Meanwhile, CSL Ltd [ASX:CSL] is down by 14.5% from the high it made last September. It led the market at that time and was up more than eightfold in seven years. It’s currently knocking on the door of resistance at $200.

That covers the majority of stocks in the ASX 200 index. They’re the key drivers of direction in the benchmark ASX 200 index. There’s a wide range of support from multiple big-cap names without the need to rely on just a few to do the heavy lifting.

For the first time in a while, most of their charts are travelling in the same direction.


Terence Duffy,
Associate Editor, Cycles, Trends & Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia