This morning, National Australia Bank Ltd [ASX:NAB] released its half-yearly results ahead of schedule.

The reason?

Well, in addition to announcing a 25% decline in cash profit, and a 60% cut to the interim dividend, it revealed a $3.5 billion capital raising. Clearly, it wanted to get in ahead of the other banks.

Because if NAB needs capital to insulate itself from this downturn, you can bet the others do too.

The institutional placement will occur at $14.15 per share, a 10% discount to the last traded price. While the price is slightly above the panic lows reached in March, the capital raising will take place BELOW the lows from the GFC.

It’s quite incredible to think that after financing a huge property boom over the past decade, NAB shareholders are in a worse place than where they started the cycle. And we’re only a month or so into this downcycle!

Of course, there have been dividends paid along the way.

But unless you bought close to the 2009 low, your overall return from investing in the ‘safety’ of the Big Four banks has been very poor indeed, with the possible exclusion of Commonwealth Bank of Australia [ASX:CBA].

NAB’s announcement today hasn’t done any favours for the other banks. At time of writing, Westpac Banking Corp [ASX:WBC] is down more than 5%, while Australia and New Zealand Banking Group Ltd’s [ASX:ANZ] share price is off 3.75%. CBA, as usual, is the relative outperformer, down around 2%.

Despite heavy falls from the banking sector, the overall market is up at lunchtime, after a weak start thanks to NAB’s announcement.

That’s clearly related to increasing optimism about the economic effect of easing restrictions.

The biggest mover in the ASX 200 today is car dealer AP Eagers Ltd [ASX:APE]. At time of writing it was up 15%, followed by online property advertiser Domain Holdings Australia Ltd [ASX:DHG], up around 10%.

Retailers are also doing well today, on the back of shoe retailer Accent Group Ltd [ASX:AX1] announcing a move to begin reopening its store network. It also revealed online sales had jumped dramatically during the shutdown phase. Its share price rose 20% by midday.

Incidentally, I highlighted three quality retailers in a recent report to subscribers of my Crisis & Opportunity investment letter. Given the share price falls experienced by the sector, there are some good value opportunities emerging.

So it’s not surprising to see some strong share price moves given the sense that we’re on the way back to some sort of normality.

But that’s the question, isn’t it?

What will this new normality look like?

No one really knows.

Given this uncertainty, how should you handle it in terms of your investments?

If you don’t have a strategy, it’s times like these that you’re most exposed. You tend to react to the daily market moves.

When stocks rise, you think you may have missed out and want to get back in. And when stocks fall, you worry that the market might be going lower…much lower.

A simple strategy I use to deal with a market like this is to frame things in terms of probabilities.

No one knows what the future holds, so probabilities are all we have.

So ask yourself this: What is the probability of the market (or any stock that’s been hit hard by this crisis) going back towards their highs any time soon? A reasonable observer would suggest the probability is low.

Conversely, what is the probability of the market continuing to fall to new lows in the months ahead? I know everyone has different views here, but I would say that’s a low probability too. Like it or not, central bank and government support of the economy will put a floor under share prices in the short term.

And provided earnings don’t collapse, the market offered good long-term relative value at the March lows. This is why prices didn’t stay there for long.

That leaves the more likely outcome for share prices to ‘do nothing’ for the next few months at least. I still think you’ll see plenty of volatility. There will be hopeful rallies and nervous sell-offs. But in the short term, at least, I don’t think the market will do a great deal.

The message coming from the market supports this ‘probability’ framework.

You see, I’m not just trying to give you my opinion here. My opinion, like everyone else’s, is pretty much worthless. What I’m trying to do is listen to what the market is saying and evaluate probabilities from there.

With that in mind, let me show you a few charts.

The first is the benchmark index, the ASX 200…

The Insider

Source: Optuma

What do you see?

Hold that thought.

The banks make up a good chunk of this index (around 25%). They are likely weighing in prices. OK, let’s have a look at a few others to see if they’re any different.  

What about smaller companies? Here’s the Small Ordinaries Index:

The Insider

Source: Optuma

Or the economically sensitive Industrials Index:

The Insider

Source: Optuma

Then there’s the consumer. Here’s the Consumer Discretionary Index:

The Insider

Source: Optuma

And the more defensive Consumer Staples Index:

The Insider

Source: Optuma

OK, enough of the charts.

What do they all have in common?

Well, apart from the defensive staples, all of them bounced back to near the 2018 lows and turned down again.

More generally though, they are ALL in medium-term downtrends. The blue and red lines on the chart represent the 50-day and 100-day moving averages. They’re a good proxy for a medium-term trend. As a rough rule of thumb, when the blue line crosses below the red line, and the share price remains below both, a stock or an index is in a downward trend.

Why is this important?

Well, when a stock or an index is in a downward trend, buying is a low probability play. It’s like swimming against a river current. Not impossible, but hard work.

Right now, the only two sectors that are in uptrends based on this methodology is healthcare and gold. They’re not the two sectors you want to be leading you into a new bull market.

My conclusion? I think we may have seen the worst of the selling. But the fact that the overall market — and key economically sensitive sectors — remain in a downtrend is cause for concern.

Until that changes, understand that the odds are not on your side. 

Continue below for your weekly ‘Week Ahead’ video from Pivot Trader editor, Murray Dawes.

Cheers,
Greg


Using Multiple Time Frames

By Murray Dawes

 

When analysing markets, it can be useful to keep an eye on multiple time frames at once. When they agree with each other, your confidence increases and when they conflict it can pay to tread carefully.

The current situation in the E-mini S&P 500 Futures has the monthly charts pointing down, the weekly charts pointing up, and the daily charts pointing down.

After the attempted sell-off early last week, prices went to test the weekly key bar support level and held. The reason why that’s important is explained in the video above.

Now that the weekly support has held, there is a higher probability that prices will test the upper levels of the recent range to see if the weekly uptrend will continue.

A breakout above 2,885, the high of the rally from the crash low, could signal the next leg up in this short squeeze and give targets to the 200-day moving average at 3,005 (current price 2,854).

I have many technical indicators pointing to 3,000–3,080 as an area where there should be plenty of resistance. If we do see a sharp rally up into that zone this week I will be on high alert looking for shorting opportunities.

Regards,

Murray Dawes,
Editor, Pivot Trader