The big banks have made much of the action in the stock market run during the past year as investors sought yield, strength and stability. The recent reporting season saw the big four own up to $27 billion in profits compared with $25 billion the previous year and boost dividends by between 10 and 15 per cent.
But with dividend yields falling towards 5 per cent (4.8 per cent in CBA's case) compared with 8 per cent before the run started, sluggish growth in the rest of the economy and the construction phase of the mining boom dropping off, investors are starting to wonder how long it can last.
This week's chart of the banking index, produced by Paul Ash, Victorian president of the Australian Technical Analysts Association, addresses that question.
The chart shows the banks in a solid uptrend during the past year with the bellwether 30-day moving average making only three retracements. The first was in May/June when international markets panicked on the mention of the tapering of money printing by US Federal Reserve chairman Ben Bernanke, the second was a fleeting down week in October and the third a brief dip in recent days. The triangle on the chart shows an established uptrend in June when the index rallied from the May falls.
Recently the price broke out of that congestive pattern on the upside, moving through the horizontal resistance line that had marked the top of the formation.
The chart at the time of writing is at a pivot point with the index turning down 5 per cent from its highs and briefly falling through the moving average, which is in itself flattening out and looking a little shaky. Then it recovered to climb above the critical point on the chart to be down about 3 per cent.
We must now watch to see if the recent recovery holds and the uptrend for the banks continues. Current weakness sees the index on the verge of falling back through the upwards trend line that has been projected past the old resistance level at 8600. If that trend line is breached again, then the old resistance line should turn into a support.
Looking at the relative size of retracements gives us another tool to judge the state of the market. The first retracement measured 16 per cent from its then peak.
Since then there have been two retracements of 3 per cent and one of 5 per cent before recovery saw it about 3 per cent down. If the index again dips below its current retracement and falls more than 5 per cent from the peak, that will be a sign of weakness as the index has broken out of those previous downward patterns. Ash suggests investors with exposure to the banks watch for any fall below the trend and support lines.
This column is not investment advice. firstname.lastname@example.org, ataa.com.au.
The numbers you need
150 per cent
... is the level of household debt relative to disposable income that has been broadly steady since around 2006, according to HSBC Australia.
... was the value of the Westpac- Melbourne Institute leading index of economic activity in October, pointing to "a much better outcome for the economy over the next few quarters", says Westpac chief economist Bill Evans.
16.9 per cent
... is the return in the 12 months to the end of October of the average balanced super fund according to SuperRatings.
... is how many percentage points industry superannuation funds, by median return, outperformed retail master trusts over the 10 years to October 31, 2013.
150 per cent
... is the household debt-to-income ratio. That is high by international standards, but most of the debt is held by high-income households, with many ahead on their mortgage repayments.