Aussie Market Needs to Break Through This Level



An election is coming. Or that is how it looks anyway.

Yesterday, Malcolm Turnbull, bereft of ideas on how to run the country, resorted to lawyers’ games by calling a double-dissolution election on 2 July.

With Australia screaming out for genuine reform — reform which the Coalition has all but run away from — Turnbull rolls his sleeves up and plays politics.

As The Guardian reports:

Turnbull announced on Monday he had asked the governor general to recall parliament for three weeks from 18 April to consider the long-stalled industrial laws, and declared that he would call a double-dissolution election for 2 July if they were not passed.

With Labor and the Greens implacably opposed to the laws, Turnbull needs six of the eight crossbench senators to pass the bills. On the current positions of the crossbench senators that appears very unlikely.

So the proposed law won’t pass, triggering the call for an election?

Not so fast. Labor and the Greens plan to counter the government’s move by taking the issue to the courts. A debate about constitutional law is just what this country needs, it seems.

That’s perfect symbolism. We’ve descended into a pathetic bunch of lawyers squabbling over words in an attempt to avoid making the tough, but necessary, decisions the country needs to grow and compete in the aftermath of the commodities boom.

Canberra is nothing more than a festering sore of power hungry lawyers. No wonder this country is going down the tube…

But Turnbull just keeps on with the rhetoric, despite it having no substance. From the same Guardian article:

Turnbull said he was challenging the Senate to pass the laws because “the time for playing games is over”.

He said the election would be fought on the question “who do you believe is best able to continue successfully to manage Australia’s economic transition?”

“Who has the policies and the leadership that will ensure there is more investment, more innovation, greater productivity, and better jobs for your children and grandchildren? That is the question. Every single policy we have set out is calculated to deliver those outcomes.”

Is this bloke serious? Canberra is a policy ghost town. The ‘Ideas Boom’ is straight out of the Orwellian playbook.

The only idea anyone has had is to stand back and watch the housing bubble expand to society-straining proportions.

And, to be honest, the housing boom is the RBA’s idea. The government is too busy knocking back ideas to come up with any of its own.

Luckily for the politicians, the housing boom looks like keeping the economy superficially strong during the election campaign. It will allow them to tell all sorts of lies about the economy for the next few months.

I can hardly wait…

But as far as markets go, things are looking OK for the time being. Thanks to global coordinated central bank action, speculative capital has moved back to the ‘long’ side of the ship. That is, it’s time to buy.

The question you need to ask is how long can this artificial state of affairs last? Is this a multi-month rally opportunity or will it peter out after a few weeks?

Let’s try and answer that question…

Below is a chart of the Dow Jones Industrial Index. It’s a weekly chart showing the last three years of price action.

Source: StockCharts

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This rally has been a sharp one so far. But it’s now approaching resistance. I would be surprised to see it head much higher without even a minor correction. If it turns down before reaching 18,000 points, it will make another lower top, which could have a negative effect on sentiment.

It will also have a negative effect on the perception of central bankers’ abilities to manipulate outcomes. As I explained in Friday’s Daily Reckoning, all the world’s major central banks joined together recently to engineer a change in sentiment. If all this can achieve is a six-week rally, then it says a lot about their waning influence.

What about the Aussie market?

Below is a weekly chart of the ASX 200, also over a three year timeframe.

Source: BigCharts

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As you can see, the Aussie index is also heading towards an area of resistance. I have circled where the two previous bear market rallies stalled. On both occasions it marked where the index hit the 100-week moving average.

Currently, the 100-week moving average sits just below 5,300 points. The 50-week moving average is just above 5,200 points; the rally recently turned down from here.

The key takeaway is that the Aussie market is now coming up against several layers of resistance. Even if it can make it through these long term weekly moving averages in the next few weeks, the area between 5,300 and 5,400 looks formidable.

So, until the market pushes through 5,400 points, I’ll continue to see this as a bear market rally.

Given the concentrated nature of the Aussie market, you really need to see resources, or the banks, leading the way. Neither sector looks poised for a sustained run.

While that means the index itself should continue to struggle, plenty of opportunities remain at the smaller end of the market.

My colleague, and small cap specialist, Sam Volkering makes a habit of spotting these smaller opportunities. You can check out Sam’s latest work here. With large cap stocks hamstrung by weak and poor quality economic growth, small caps have a definite place in every investor’s portfolio.

I strongly urge you to check out Sam’s work.

Greg Canavan,

For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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