Will there be a Santa Claus rally and how will CBA and BHP fare?

Managing Director, Fairmont Equities
Print This Post A A A

The last several weeks have seen share markets tumble in the order of 10%. Investors nerves are frayed. The market is taking a glass half empty view of the world but if you look closely, there are some positives out there. Based on previous trading history though, are the buyers now ready to step up to the plate and finally offer some support?

Let’s look at the charts for the S&P 500 and the S&P/ASX 200 to determine whether we will get that elusive Christmas rally. I’ll also take a look at the two big Aussie stocks in the index, Commonwealth Bank (ASX:CBA), and BHP Limited (ASX:BHP).

The first thing to note is that despite the noise, the S&P 500 is still in an uptrend. It made a “higher high” in October, and the recent low from a few weeks ago is still above the previous major low that formed in February. That is, US markets have not commenced a downtrend. Sharp moves down are a cause for concern, but the S&P 500 can recover from here and continue higher. The major support line for the S&P 500 is near the February low, which is just under 2600. As we get closer to that level, the buyers are more likely to step in. At what point do we become negative? If the index falls under that level and it struggles to quickly recover above 2600. That then means we have the start of a downtrend. For the moment though, we are looking for buying support to soon kick in.

The Australian market is back near a strong level of support. In 2017, the market spent nearly four months trading in a range between about 5600 and 5800. This means that we are at a level that sparks some interest in investors. One thing to keep in mind is that when markets fall sharply, they usually require a month of two of “water under the bridge” for investor sentiment to turn positive again. During that time, any rallies get sold into and the market will “re-test” its recent lows. The recent volatility tells me that a decent push under 5600 is likely, but that would represent the “peak fear” stage and the market will be susceptible to a strong bounce before Christmas. We should then get another retest of these lows, which would set us up for a more sustainable move. The point where I am wrong is if a fall under 5600 results in several days or so of indecision. That would imply a lack of bargain hunting, which means further downside in the index.

The Big 4 banks peaked in early 2015 and have since shed over a quarter of their value. A key level of support for CBA was near $70. We can see this by the number of times investors stepped in and bought the stock during the last three years. The problem with CBA is not that it has broken that support level, but any attempt since then to recover the $70 level was met with further selling. This tells me that the bias is still to the downside. Considering the orderly manner in which CBA has been sliding back, I think that we will not see a low until more investors throw their arms up in despair and the stock price capitulates. The pre-GFC peak for CBA was near $61. I believe that investors are now looking at that level as the next place to consider buying. Bank investors are constantly being poked and prodded with negative news and when many of them finally give up and sell, then that is likely to be the low. Alternatively, if CBA can get its head above $70 soon and can keep it there, then we can start to view it in a more positive light.

I like BHP here and I believe that when sentiment turns positive again, resources will go for a run. During 2013 – 2014, BHP struggled on three occasions to convincingly get through the $35 region (chart is price adjusted for the South 32 spin-off). It is back to that $35 region again. What I like about this chart is the fact that we haven’t seen big sell offs up at these levels. The share price is congesting under that line of resistance. Any enthusiastic selling is met with equal buying. Once that selling dries up, BHP will be able to break to a new high. That would then result in a swift rally towards the $40 level. BHP did the same thing before breaking through $30 in 2017. I expect this behaviour to repeat itself.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Also from this edition