What Won’t Go Down….

It’s hard to write anything more precise and meaningful than an RBA statement. Tuesday’s missive begins:

“At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.”

As straightforward as Glen Stevens at a press conference skewering a journalist who asks a stupid question. Eight paragraphs follow, clearly explaining the RBA’s view on the Australian economy, the globe and the outlook. The final paragraph says:

“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

Some will argue, but I read this statement as a clear indication that the RBA is neutral on rates. “..any adjustment…” could mean up or down. This fits with the perception that the RBA is a reluctant cutter of rates, prepared to do so if the data is weak enough, but preferring to get rates back to a more normal level.

However, investors may instead zoom in on:

“In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with a modest pace of expansion in employment in the near term.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend and credit growth has been moderate. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”

(My emphases)

This is the modestly positive Australian economy. Heroic growth rates will not return anytime soon. However, the economy is expanding, and this should mean overall growth for the share market. And the transition from a commodity lead economy is in broad terms occurring.

The sideways trading of the Australian share market will end at some stage, with (in my view) a break out through the top of the trading range. The market reaction to events of the last two weeks is extraordinary.

The chart below shows the sell-off that occurred on Brexit Friday. In the following week, the Australia 200 index recaptured most of the lost ground. This week, despite the uncertainty around government, and the likelihood that any reform agendas will be held hostage in the Senate, the index has held its ground.

Think back to January and February. If either of these events occurred then, the market may have shed several hundred points in a session. Instead, it’s moving back towards the top of the ten month trading range.

Frankly, this strength is surprising. Buyers are still shunning financial and consumer exposed stocks, but buying almost everything else. BHP and Rio have featured. Telstra is up, and gold and energy shares are finding support. 

This type of market behaviour – a market that won’t go down despite poor news – is often a sign of underlying strength. The past week is characterised by top down selling of the index by large and international players, met by bottom up buying of individual stocks. Bargain hunting was clearly evident in the Brexit sell down. This soaking up of shares by cash buyers can shift the balance of the market, especially if the buyers are long term investors.

This could see the market break through the top of the trading range sooner rather than later. My year-end target of 5900 remains in place, but may occur earlier than I suspected. Originally looking for an upsurge in October, I’m now watching the market very carefully as it approaches 5400 again.

A clear break of the levels that have acted as resistance for almost a year would be a sign of real strength in the market.

The line in the sand is 5430. A market close above this level changes everything, with real potential for an uptrend to develop. So I’m a buyer above 5430. Naturally, I’ll use stop loss orders for these stocks in case the up move fails, and becomes a false break. A return to the sideways trading range is still a possibility, and of course the index may fail around 5400 instead. Listening to what the market is saying is an investor skill as useful as listening to the RBA.