FNArena’s Weekly Insights – March 15 2021

In today’s Weekly Insights:

Are Australian Banks Back As An Indicator?

By Rudi Filapek-Vandyck, Editor FNArena

Pre-extreme market polarisation, I had developed my own share market indicator for the ASX, and for a while it proved rather reliable and effective.

Its composition was extremely simple and straightforward too.

I would look up each of the four major banks and compare share prices with respective consensus price targets. If there was no more room to move, or share prices were already trading above targets, this was a strong signal that market sentiment was running a bit too hot under the collar, and a pull back, at the very least, would ensue next.

It seldom took long for that pull back to follow next. Yes, those were the days. Economic cycles were text-book copies. Forecasting was a lot easier. And share markets moved en block, not segment per segment, or as has been the case in recent years, along extremely polarised demarcation lines.

The big four Australian majors are still important index weights, but in a polarised market they no longer represent a weather vane for market sentiment or share market direction in general, hence I have not written about my indicator for a long while.

Remember, the sector has been in a sustainable down-trend for more than five years (from the peak in April 2015) and only climbed out of its, partially self-induced, bear market cycle late last year.

In a market that is driven by Apple, Microsoft and Tesla in the US, and by CSL, Macquarie Group and Afterpay locally, trying to draw any conclusions from share prices from the big four local banks is a waste of everybody’s time. But in 2021, the banks are back, and so are insurers, builders, contractors, and other cyclicals, so maybe this means my proprietary market indicator is making a come-back too?

Bad news.

Share prices for both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) were trading slightly above consensus target last week, and have since retreated slightly. CommBank ((CBA)) usually trades at a premium and continues to do so, currently circa 7% above target. Westpac ((WBC)) shares are still trading more than -4% below target.

Throughout most of the past two decades, NAB has been the sector laggard, ever since that sorry FX trading scandal, so this is quite the familiar set-up with Westpac the new laggard and NAB back on par with ANZ Bank. What this means, all else remaining equal, is that the Value trade locally has had a big run, and banks have been at the forefront of it, but now, maybe, investors should be asking some questions about ongoing momentum and share price valuations.

Which is exactly the kind of chatter I have been picking up from corners of the local investment community here and there. It’s not that there’s no more room to improve for the banks, but for now, at the very least, a bit of a pause seems but appropriate.

The intriguing additional observation is that, on some momentum measurements, the correction in relative valuations between Value (the banks) and Quality & Growth (CSL and technology stocks) has reached its own extreme, placing the first group into a short-term Overbought position and Growth stocks generally in Oversold territory.

In line with market dynamics over the past five months, traders will be eyeing global bond yields to assess how long, how far, how deep, and exactly when.

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