The Germany 30 and Australia 200 don't look like freight trains you'd want to stand in front of at the moment. Yet they've both hit possible resistance levels and it's at least worth keeping an open mind on how far investors will continue to push up to new risk levels in search of dividend yield at the moment
The dividend yield and risk trade off
Australian 10 year bond yields hit a low of 2.25% yesterday and term deposit rates will follow mortgage rates down in coming days. So superficially, stocks like CBA and Telstra with likely dividend yields around 4.7% before franking and 6.7% after franking look pretty tempting.
You have to have views in markets. Over the past couple of years, mine has been that, generally speaking, valuations in Australian "yield stocks" weren't too excessive. It seemed to me that, many might have been surprised about how little stocks pulled back once interest rates started to increase. Especially since a move to normalise rates would almost certainly come at a time when the outlook for the economy and earnings growth was improving.
However, it now seems to me that from here on up, any rally in valuations are likely to be entirely dependent the outlook for low rates and, probably, for even lower rates. As soon as the stock market starts to form a view that interest rates are going to lift, dividend yields will also be "normalised" and stock valuations will fall.
It might very well be that low rates are with us for quite a while to come, so valuations can certainly push up from here. Share prices could go quite a lot further if low rates are here to stay for a fair while . However they will be pushing up into increasingly risky territory over the longer term. To be attracted to dividend yields from here on, investors will have to believe that either:
- Low rates are here for the medium term so the there will be plenty of time to make money out of higher dividend yields and/or
- They can bail out of yield stocks before most other investors get wind of higher rates, minimizing the extent to which capital losses wipe out the extra income from dividend yields compared to bonds or worse
From a short term trader's point of view, this logic means that while a continued push higher in stock indices is certainly on the cards, it's worth keeping an open mind to the possibility that investors will collectively be too risk averse to keep pushing prices up much further. If this happens the current rally will falter
Yields up today
Another point of interest for short term trading dynamics is that Australian bond yield are actually up today. The 10 year has recovered from 2.26% to 2.45%. This provides another reason to be a little cautious of the dividend yield bull market at the moment
Stock Index chart resistance
The Australia 200 and Germany 30 have both rallied hard in recent days. This means that many traders would prefer to see them show signs of starting to peak before assuming a pullback might be on the cards. However, both these indices have reached potential resistance levels, so any sign of weakness at current levels could be significant
Australia 200 Weekly
The Australia 200 has reached the zone of resistance formed by an upward sloping resistance line. Rejecting this for a 3rd time would confirm the possibility that the market remains in an expanding "Jaws of Death chart pattern.
For good measure this resistance coincides with an ABCD pattern projection where CD = AB X 1.618
Germany 30 Weekly
It can be encouraging when different markets around the world arrive at significant chart points at the same time.
If the Germany 30 backs off from around current levels it will complete an AB=CD pattern as shown on the chart below