Pearls and Irritations

Callum Thomas, editor of Top-Down charts sums it up well – “Sentiment is increasingly consensus bullish. Bears have all but gone extinct. Large and small investors alike are basically all-in. Tech stock valuations have surpassed the 2021 peak. Downside volatility has collapsed. Overall, the evidence is all consistent with what you typically see during a bull market.”

Economic news

Australian consumer sentiment and business confidence remain low, business conditions are positive but rapidly slowing, retail sales remain weak, and annual price inflation has been stuck in a rut of 3.4% for the past three months.

This sends two messages to the Reserve Bank of Australia – the inflation fight is far from over, but high interest rates are biting consumers and businesses hard.

In the USA, consumer confidence remains modestly positive but with no discernible trend over the last six months. However, consumers’ future expectations deteriorated significantly.

The latest US core and headline inflation rates (based on personal consumption expenditure – PCE) suggest the Federal Reserve Bank’s fight against inflation is stalling due to increased fuel inflation.

Market overview

Notwithstanding a sluggish economy, the Australian All-Ords share index at the start of March escaped its straitjacket of see-sawing sideways below 7,900 since April 2021.

Bulls welcomed this as a sign that the market was finally free to climb higher. But after peaking on 8th March 2024, the index slumped before rebounding. It is now convincingly out of the horizontal channel it was stuck in for almost three years.

Bulls are naturally ecstatic while bears say exuberance always precedes a fall. Only time will tell, but for the moment this is a booming bull market and has been so for most of the last five months. In that sense both my short-to-medium term and medium-to-long term trend models have called it correctly. See next section below.

Australian All-Ords has escaped its horizontal channel of the past three years

Trend analysis

Australia’s market

On short-to-medium-term trend analysis, the All-Ords index is bullish since its red 10-day trend line is above its green 30-day one.

Its price momentum as measured by the MACD has been negative for the past nine trading days, though less so since last Monday.

On medium-to-long-term trend analysis, the All-Ords index is bullish. Its green 30-day trend line is well above its blue 300-day one.

Unlike America, Australia’s stock market for most of last year swung sideways because it has few tech stocks promising new riches through AI (artificial intelligence). However, the All-Ords like the S&P 500 has enjoyed a strong rally since October but for a sharp pullback in January.

The All-Ords dark green Coppock (COP) momentum indicator bottomed at the end of December 2022 and thereafter trended up into positive territory where it has wobbled, but still stayed moderately positive.

In the past whenever the Coppock turned up in negative territory it signalled the end of an Australian bear market. Only end of month readings are meaningful since the Coppock is a monthly based index.

America’s Market

The Australian All-Ords index is highly correlated to the American S&P 500 index as shown by the following chart. About 70% of the All-Ords movements are in synch with the S&P500, meaning only 30% is influenced by local or foreign events not impacting the USA. Hence the importance of tracking what is happening on Wall Street’s stock exchange.

With soaring hi-tech stocks, America’s S&P500 share index continues to be bullish on short-to-medium-term trend analysis since its red 10-day trend line is comfortably above its green 30-day line. Its MACD momentum indicator went positive in the last fortnight.

The S&P 500 index’s medium-to-long-term trend went bullish on 14 April 2023 after the S&P 500 share index’s green 30-day trendline rose above its blue 300-day trendline. It became extremely bullish after its 10.3% correction in August to October 2023.

The dark green S&P 500 Coppock (COP) momentum indicator turned up at the end of March 2023 and thereafter has continued rising and is strongly positive which confirms that the previous US bear market is well and truly over. Only end of month readings count for the Coppock since it is a monthly signal

Bulls versus Bears

Bears have gone quieter since the share market’s strong rebound in the last fortnight. But they are still warning that the US market looks overstretched so is due for a correction. See next chart. If that happens it will disrupt other markets including Australia.

Source: https://www.estimite.com/post/is-the-us-stock-market-overvalued/

Bears also say China’s deflating economy is a game changer and will drag our resources sector, government finances and general prosperity down with it. Also, aggressive home loan rate rises between May 2022 and November 2023 (see chart below) are eroding Australian household budgets forcing many families to cease their discretionary spending.

Bulls say that since September 2022 the All-Ords index has been climbing a “wall of worry” which is normal for a new bull market. In their view the fact that it has convincingly escaped its trading range straight jacket of the last three years demonstrates it is over the pandemic economic crisis so can advance further from here.

Bulls believe the global economy is poised to recover because inflation is falling, and global financial stress has significantly eased since the middle of last year. See chart below. Moreover, China’s communist government knows that to survive it must keep lifting the living standards of its citizens so it will do whatever it takes to restore its economy to health.

Source: https://www.financialresearch.gov/financial-stress-index/

Moreover, US financial conditions have significantly eased helping to boost share prices and avoid a credit crunch that would throttle the economy. See chart below.

US Financial Conditions Index (negative means looser financial conditions)

Source: https://fred.stlouisfed.org/series/NFCI

Indeed, US credit markets are aflush with cash, with the Moody’s Baa Corporate Bond spread (to 10-yearTreasury Bonds) at its lowest level in a quarter-century. Note this chart.

Consequently, the US economy is doing well with no recession in sight. See next chart.

US Economic Index (positive means economy is growing)

Source: https://fred.stlouisfed.org/series/WEI

Bulls and bears cannot both be right. 2024 will decide the fate of both economies and markets, a hard, soft or no landing. So far positive investor sentiment is triumphing.

What my models say

I do not forecast markets because those who do so generally get it wrong. Nor do I give investment advice. Instead, I gauge the market’s present trend and momentum to let Mr Market speak for himself. Then I try to rationalise Mr Market’s behaviour on monetary, fiscal, economic, or political grounds or technical ones such as overreach correction.

My technical models show:

• On short-to-medium-term trend analysis both the Australian All-Ords index and the American S&P 500 are bullish.
• On medium-to-long-term trend analysis the Australian and US markets are also bullish.
• The Coppock momentum indicators of both markets are positive. They turned up in negative territory early last year signalling the previous bear market was over.