Guest Article Written By: Robert Blake

When the US Federal Reserve raises interest rates it always affects the US dollar. In this case, the hike would normally reduce the inflationary pressure, and as a result appreciates the dollar. The latest decision to raise the target for the fed-funds rate to a range between 1.75%-2%, in June of this year, was due to a stronger economy and a healthy US jobs market.

We mentioned previously on Crush the Market how interest rates have been steadily rising since 2015.
With three to four increases forecasted for 2018, the graph of the Fed “dot plot” below illustrates how eight policy makers expect four or more quarter-point increases for the year.

Traditionally, interest rates in the United States averaged about 5.72% from 1971 to 2018, with Money Cafe reporting a high of 20% in March 1980 and a record low of 0.25% in December 2008.

Higher interest rates generally mean a lower economic growth, but also slower inflation. In the past, the best way to achieve full employment and stable prices was to set the inflation rate of the dollar at 2%, which would grow the economy at a healthy pace. The Fed hiked this year, in response to a growing economy and fear of rising inflation, increased interest rates by a quarter of a percentage point. Jerome Powell, Chairman of the Federal Reserve, remarked that the “economy is doing very well,” following the rate hike announcement. The graph below shows the historical Fed rates over a period of 47 years.

Historically, even with low interest rates the US dollar enjoyed favorable exchanges rates in relation to major currencies like the Euro or the Pound. Investopedia reveals that this is in part due to the US dollar being the reserve currency for much of the world. As a result of higher interest rates and a strengthening dollar, more Forex traders will be hedging on the US dollar.
FXCM outlines that the Forex market trades an average volume exceeding $5 trillion daily, and the current Fed interest rate plays a factor in determining the value of the US dollar. 

However, it is mainly its perception as a safe haven in uncertain economic times, which has been the main reason for its high value in relation to other currencies. However, it is mainly its perception as a safe haven in uncertain economic times, which has been the main reason for its high value in relation to other currencies.

Bloomberg reported how the dollar spot index, which tracks a number of global currencies against the US dollar, rose temporarily immediately following the Fed announcement.

As was expected, however, the trend that the Federal Open Market Committee (FOMC) is following seems to indicate that it’s stepping up the pace of rate hikes, stating that economic growth should continue regardless. While the course of the increases will remain gradual, the perceived aggressive pace demonstrates how the FOMC is looking to tighten policy amid falling unemployment levels (which fell to their lowest of 3.8% in May) and national growth.

The following chart illustrates the historical date of the price-adjusted US dollar index published by the FOMC.

For now, the economic forecast indicates that core inflation will reach the Fed's target of 2% by the year’s end with an overall economic growth of 2.8% for 2018. As such, with a fourth and final hike projected for this year, the Fed indicated that it will expect more rate hikes in 2019. Despite the recent hikes, as part of their long term forecast, the committee indicated that they still see the rate increasing to 2.9% and peaking at 3.4% by 2020, with an estimated GDP increase of 2.4% in 2019 and 2% in 2020. In addition to upwards estimates for GDP and inflation, the committee also estimated a cut to their original unemployment projection, from 3.8% to 3.6% for the full year. Despite the current political turmoil in the US, the economy continues to look positive.

Author Bio: Robert Blake is a freelance financial adviser and consultant. Since gradating from university he has started writing finance articles online to help give readers a clearer understanding of the US and global economy. In his spare time he can be found visiting financial seminars.

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Stellar Run

Netflix has been on a tear over the last 12 months as investors continue to focus on the rampant rise of subscriber growth especially in the international market. From the image below you can see that domestic growth has been steadily rising in the US, however the real star has been international growth as Netflix has been introducing its content into several new countries.

Even more surprising has been the record surge in the stock from the start of this year now having risen 30% year to date.

Netflix stock jumped higher today in the futures market after the stock closed for trading as the market digested the earnings report. I have added the latest jump taken from CNBC.com where the stock has moved a further 8% after a strong day leading up to the earnings release. It seems the company cant do no wrong.

What Investors Are Ignoring

One of the key reasons why Netflix subscriber growth has been so spectacular has been due to the fact that Netflix pricing for its streaming services is extremely low. This is even more evident when you compare it to traditional cable / pay TV companies.

By keeping the pricing low its placed a huge strain on its cash flows, as the company has been spending record amounts of its cash as its business model clearly inst sustainable even though company is growing so quickly. With the chart below you can see its latest cash burn was staggering at $523 million for the most recent quarter.

Whats even more worrying is the company is forecasting to burn through a total of $4 Billion in 2018.

Original Content Is Its Achilles Heel

The other key reason for the massive cash burn for Netflix is its huge budgets spent on generating its own original content. Not only has it been rising every year for the last five years, but its expected to hit $7.5 + Billion based on forecasts. (See Below)

The company's historical content spending is as follows:

2018: $7.5-$8 billion (forecast)
2017: $6 billion
2016: $5 billion
2015: $4 billion
2014: $3 billion
2013: $2 billion

Netflix content also outpaces its competitors own content budgets by a significant amount with a spend of approximately double its closest competitors content budget.

The end result of Netflix business model is the company is knowingly placing huge strains on its balance sheet with the loss of billions in cash each year and rising debt which is sitting around $20 Billion to fund its yearly cash burn.

For the moment none of this matters as stock investors cheer the company on by bidding it higher and higher rewarding the company for such reckless spending that it clearly cannot sustain.

Why Low Rates Are Important?

Netflix like many companies listed in the US are more reliant than ever on low interest rates to fund their business model. If US Government 10 year bond yields continue to move higher it will spell disaster for Netflix and other companies who continue to accelerate their debt levels to fund their losses.

If yields move beyond 3% it will mean significantly higher interest payments and accelerate already high cash burn levels which could ultimately lead to bankruptcy under their large debt levels. However until that day its celebrations all round for investors as the fundamentals don't matter at all.

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The top 200 largest stock index in Australia (XJO200) has run into long term resistance in May as it failed to breach the 5925 level. After hitting the resistance level late April and early May the XJO index has fallen around 200 points from the recent high of 5925.

Since forming a double top and confirming the reversal lower in May, the XJO index of the top 200 largest stocks is set to continue to fall further as it takes a breather from the recent strong run over the last 12 months. The road ahead for the index isnt clear as a number of major headwinds are approaching making further gains difficult.

Monthly Chart Review

Can The XJO Breakout Of The 5925 Resistance Level?

From a number of technical indicators the XJO index is likely to pause from its recent strong rally higher as it runs into some exhaustion within its uptrend.

Since the the XJO index is in a uptrend that has been running for a number of years as shown in the chart below, its likely that the index will head lower towards its long term uptrend around the 5525 which is its first level of support. If the index continues on its reversal lower towards support it could be several months before we see the chance for the index to make another run higher towards 5925.

XJO Headwinds - Potential For A Break Of Long Term Uptrend

The momentum indicators are supporting a move lower over the next few months leading into earnings season in Australia. In addition the slow stochastic is approaching its peak upper level on the monthly chart and about to cross lower. If the slow stochastic crosses over like it did back in March 2015 (See chart below), we would most likely see considerable correction in the XJO index over a 12+month period resulting in a break of if its long term uptrend. If this was to occur the only thing that could potentially reverse the move lower would be consecutive drops in interest rates by the RBA and or Government stimulus.

Australia's Macro Headwinds Could End The Long Term Uptrend

The other headwind facing Aussie stocks for the remainder of the year and 2018, comes from the macro picture in Australia, as the slowdown of the real estate market has begun with prices starting to fall in Sydney and Melbourne in May (See article below). The property boom up until recently has been driving the economy and a large part of the GDP growth. However this appears to be over as a number of interest rates from the banks, has finally stopped the strong real estate growth in prices. Together with construction boom spending now falling as the banks continue to tighten lending standards likely to slow the economy as well.

Below is a few recent articles outlining the headwinds stocks, real estate and the economy are facing over the coming months.

Weekly Chart Review

The weekly chart of the XJO shows a similar story to the monthly chart, with the index making a double top as well as the momentum indicators falling as the buying spree reaches exhaustion within the XJO index.

The only difference with the momentum indicators is that momentum has turned negative sitting at -62.2 and the slow stochastic has turned several weeks ago and looks to continue to move lower of the next  few weeks.

On the weekly chart I would look out for a pull back in prices, potentially to the target area drawn on the chart around support of 5570. The key to watch is if the XJO index breaks down further closing below the blue uptrend line on the weekly chart.

If the weekly uptrend (blue line within target area) is broken all bets are off as we could see a move down all the way to around 5000 over the next few months.

Add in the earnings season which starts in late July, there is potential for a lot more volatility over the next 3 months.

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Rising Rates About To Crack The US Economy Under Record Debt Levels

To view my most recent Stock review  click the link below:

Telstra Goes From Bad To Terrible As It Closes Below Long Term Support

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

Telstra is Australia's largest listed Telco and has been a favorite stock to own among retail investors due to its high dividends. However its popularity has been tested over the last 12 months as the share price has gone from bad to terrible, falling from a high of $5.85 as recently as July last year to new multi year low of $4.00. 

Up until October 2015 Telstra's share price had been enjoying a multi year bullish uptrend rally. However after breaking its long term uptrend In October & November 2015, the share price experienced a steady decline lower over the last 18 months.

Why Has Telstra Recently Crashed?

Telstra has a number of challenges that it faces over the next few years as a number of earnings drivers will be drying up quite dramatically over the next 3 - 5 years. This is leading to Telstra having to find new earnings growth drivers to replace existing declining earnings streams. So far though the market is not convinced as the share price is in a long term downtrend (See article below on losing earnings drivers)

In addition to the medium to long term challenges faced by Telstra, TPG Telecom announced last week that it is buying mobile spectrum and will begin to builds its own mobile network instead of being a re seller. (See announcement below)

This announcement which was released on the 12th of April spooked Telstra investors as they dumped the stock on the day, followed with more selling over the next few trading days falling to a new multi year low of $4.00 a share.

With a few trading days left in the month of April Telstra is set to break a key long term support level of $4.50 which could lead to even lower prices over the medium to long term.

Telstra Chart Review

Monthly Chart

Telstra's monthly chart  is not providing much positive news for its shareholders as the monthly chart is set to break another key long term support level of $4.50. (As shown on the chart with the 2 circled areas) If this is to occur the most likely direction over the medium term is towards its next support level of $3.85.

Momentum Indicators Confirm Bearish View

The monthly chart momentum indicator has been in the negative since late 2015 when the share price closed below its long term uptrend. Currently its heading lower again after making an attempt over the last 12 months to move back into the positive. The Slow stochastic shows a similar pattern as it struggles to swing higher.

Volume has also been above average so far this month with the significant falls experienced in April, which is also another bearish sign for the stock, that investors have been aggressive in dumping the stock.

Currently the price has recently popped higher after reaching $4.00 last week, as it closed on Monday at $4.21, which may indicate some short term relief for the stock after significant falls.

Weekly Chart

The weekly chart provides some positive news for shareholders despite its bearish similarities to the monthly chart.

Similar to the monthly chart the weekly support level of $4.50 was clearly breached recently which is not a positive for the stock over the medium term. However after reaching within days its next support level of $4.00 a share, it appears to have respected the $4.00 support level for now. 

Last week's candle showing a long tail pointing down also indicates buyers stepping in to bid the prices highers giving some temporary relief to shareholders after falling sharply from the $4.50 levels.

Although momentum indicators are strongly in the negative supporting the bearish outlook on the weekly chart, it appears that the indicators are about to swing higher which could see the price move towards its previous support level of $4.50 over the coming weeks. However we would need confirmation of the weekly momentum indicators turning higher to support this.

If the $4.00 support level fails to hold over the next couple of weeks the next level of support is $3.75. Given that the yield on the stock is quite high now with the recent price falls and we are coming up to earnings season in July August, its unlikely that we will see the stock fall below the $3.75 support level without an earnings and or dividend downgrade in the next few months.

Daily Chart

The daily chart of Telstra has been a classic downtrend cycle for some time, with the stock reaching the extreme points of the trend on several occasions as indicated on the chart below. Given that the share price had recently fell below the trend line on the downside briefly and recovered back within its down trend indicates that the stock may be oversold and is due for a short term recovery and possibly back to $4.50 resistance.

A close above $4.50 could see the stock move towards $4.75 which is possible if investors decide to take advantage of the dividend in the coming months.

The slow stochastic on the daily chart has swung higher as it reflects the recent bounce after touching $4.00 a share. Momentum is still negative at -0.46 so caution is warranted still, especially since the stock is in a clear down trend momentum with plenty of negative sentiment surrounding the stock.

Overall the stock's bearish indicators and long term downtrend warrant the title of going from bad to terrible.  For any new investors who have taken advantage of the new lower prices may find the current dividend yields higher enough to warrant the potential risks. However existing shareholder may not share the same sentiment consider they are nursing considerable losses in the share price over the last 6  - 12 months.

Given the medium term outlook for fundamentals  from a loss of earnings from some divisions of the next few years together, as well as increased competition from TPG Telecom and a long term downtrend, it appears that the stock will continue to disappoint.

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Rising Rates About To Crack The US Economy Under Record Debt Levels

To view my most recent review on Oil click the link below:

Crude Oil Set To Break 13 Month Bull Rally As Supply Continues To Rise

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

Crude Oil Under Pressure From Rising US Production

Crude Oil is about to break its 13 month uptrend as rising US crude production is starting to break down the price of Crude Oil. This is despite OPEC announcing a supply cut some months ago to help stabilize the price of Crude Oil. 

If you take a look at the chart below of US  Crude production and Oil Rig count within the US, they both seemed to level out around September / October 2016 just as the last leg of the downtrend  of Crude Oil was playing out. Since making the lows late last year the rig count has been steadily rising with production levels rising along side the rig count albeit on a 1 - 2 month lag.

Record US Crude Production Leads To Record Glut

Since US crude oil production has been soaring for several months now, inventories have also been rising along with rising production. Compounding the issue is the US economy which has been slowing for close to two years now. Now the decline in the US economy is accelerating consumption demand for gasoline within the US is also falling. Hence you will notice on the chart below on the right the sudden spike higher in inventories. 

Crude Oil Monthly Chart Review

Since making multi year lows back in February 2016 touching USD $26.14 a barrel, Crude Oil had been steadily climbing for around 13 months. After closing above its downtrend line back in April 2016, Crude continued to march higher for the remainder of 2016 and into early 2017. With just 1 trading week left in the month of March, unless there is a major reversal this week Crude Oil is set to close below its 13 month uptrend with a large red candle.

Crude Oil Heading Towards $41.50 Target

Based on the current outlook of the Monthly chart with a clear break of the uptrend currently occurring for Crude Oil, the next level of support on a monthly chart is around the $41.50 - 60 level which is another $6.50 - $6.60 or 13.75% lower from the current price.

Looking at the momentum indicators below, they are both supporting the current weakness in the price, as Momentum even though is still positive is heading back towards zero. The stochastic momentum indicator is also showing that based on the current price of $48 would form a bearish cross. (See circled area within Stochastic indicator) Monthly stochastic indicators are usually more reliable indicator of change of trends as they are much longer time frame and take a long time to form.

Hedge Funds Change Direction As Crude Oil Prices Shifts

Up until as recently as February 2016 Hedge Funds had placed a record amount of long contracts (betting on higher prices) for Crude Oil. Since then Hedge funds have begun to reverse their bullish bets setting a new record for reducing the bets for higher prices. The swift change in sentiment among Hedge Funds and Traders was due to the price falling below the physiological $50 level.

Crude Oil - Weekly Chart Review

Taking a closer look at Crude Oil via the weekly chart you can see that the price tried to break higher numerous times back in January and February this year. However after reaching the the $53.80 - $53.95 level on several occasions the price collapsed a few weeks with a long red candle which I have circled on the chart.

Momentum Falls Below Zero

Momentum is currently sitting at -5.74 on the weekly chart having closed below zero in the first week of March as the bulls became exhausted and finally gave in to lower prices.

The weekly Stochastic momentum indicator has been falling for several weeks now confirming the weakness in price. Since both indicators are supporting the falls in price on the weekly and monthly chart, it suggests that there is a high probability that the weakness in Crude Oil will continue over the medium to long term.

Since Crude Oil has confirmed a close below the weekly uptrend 3 weeks ago, the next level of support on the weekly chart is $40.50 a barrel.

Watch For A Surprise Reversal Above $54

Although very unlikely to occur over the coming weeks, I suggest watching out for a potential reversal in price back to the current resistance level of just below $54 a barrel. There may be another attempt to break above $54 but will unlikely succeed with current oversupply issues facing the market with rising US production.  The reason why I suggest looking at for the reversal is if OPEC announces further cuts to their supply to attempt to stop the falls in price.

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Rising Rates About To Crack The US Economy Under Record Debt Levels

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Russell 2000 Bullish Run Looks Tired As Momentum Falls

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US Interest rates have been steadily rising since the lows in July last year, as the market reacts to both inflation pressures, FED commentary and 2 rate rises in 15 months. As a consequence interest rates have risen around 1.2% for US 10 year Government bonds since July 2016. Rising rates has created a major headwind for the US economy, as the weight of the massive debt levels for consumers and companies are starting to have a weakening effect on demand dragging the US economy towards slower growth. In spite of slowing growth economy the US stock markets are or near all time record highs as bullishness over the Trump presidency have overridden a weakening macro environment as stock investors look to the future with optimism.

Market Pricing 100% For FED Rate Rise For March

Over the last few weeks the probability of FED rate rise in March has been climbing, as a series of press releases and comments from various FED officials, including FED chairperson Janet Yellen have shown their eagerness to raise rates this month. Due to FED officials comments the market has priced in a 100% probability of rate rise when the FED holds their Federal Open Market Committee (FOMC) meeting and release their statement on the 15th March US time. 

US  Government 10 year Bond Yields Set To Break Out Towards 3.00%

With the recent talk regarding interest rate rises by the FED this week and the market now pricing a 100% certainty of FED funds rate rising by 0.25%, Government bond yields have once again started to climb higher for two straight weeks reaching previous resistance of 2.62% last Friday. (See chart below)

The important factor to note for the 10 year bond yields is if the 2.62% level is broken and closes above the resistance level indicated for the week, we will see interest rates move progressively higher towards 3.00% which is the next level of resistance.

Higher Rates To Hit Corporate & Consumer Credit Debt At Record Highs

If US Government bond yields move towards 3.00% over the coming months, a situation which is likely if the FED raises rates this week. This is going to have a major effect on slowing the US economy even further. The extremely high debt levels in the US, that were built up during a low interest rate environment created by the FED is now beginning to cause some serious problems for the economy and eventually stocks as well with small increases in rates having a larger impact on considerably higher debt levels.

The reason rising US Government 10 year bond yields is such an important factor in determining the health of the US economy, is because the majority of debt products for consumers and companies are priced from Government 10 year bond yields. In other words everyone will experience a rate rise and be negatively effected because the US is drowning in debt, with consumer credit and companies debt levels excluding financials are at record highs. (See charts below)

Crush The Market addressed the negative effects that a significant rise in rates would do towards the US economy back in November as rates began to spike higher in November with the election of Donald Trump. To view this article click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

Since November's article the rise in yields has played out as predicted with a slowing in a number of key macro economic data announcements, as the economy continues to slow in a rising interest rate environment causing pain for consumers, companies and the economy overall.

Consumer Credit  Debt Led By Student & Auto Loans

The picture is no different for the average consumer who is struggling under record levels of debt, with debt levels rising by approximately 1 trillion since the previous peak reached before the global financial crisis in 2008 & 2009.

The majority of the gains in debt levels have come across from an exponential increase in student debt as tuition fees for college are far outpacing CPI increases. The other main contributor for such a significant rise in consumer credit has been the boom in auto loans to the average consumer. Auto sales had previously been booming from increasing in credit for a number of years. Now as consumers are tapped out with much more debt since 2009, delinquencies are rising in the auto loans market as higher interest rates are biting hard on consumers disposable income.

The rapid increase in debt since 2009 together with increasing rates since July last year, has already been felt within the economy as various parts of the economy are now showing further continued weakness.

Higher Rates Slowing Lending Growth For Consumers

The rise of around 1.2% in US Government 10 year bond yields since July has already started to impact demand for more debt by consumers over the last year. Since the start of 2016 loan creation growth has slowed dramatically from between 9 - 10% per year to a current growth level of between 4% - 4.6% pa. Although the growth rate are in the positive the accelerating of debt growth levels is impacting retail sales within the economy. For example auto sales from the Big 4 auto manufactures have fallen by up to 11% in January 2017 from a year ago. To view auto sales data shown in my recent US economy article Click here.

Atlanta FED Slashes Q1 GDP Forecast to 1.2%

In the beginning of February this year the Atlanta FED forecasting team had set Q1 GDP as high 3.4%. Since February economic data has been released showing further deterioration and slowing in the economy with economic data missing expectations. As a result of this the Atlanta FED has had to  continually reduce their forecasts all the way to 1.2% as of March 8th. Depending on pending new economic data releases in the coming weeks we could see Q1 forecast fall below 1%.

US Gasoline Sales Begin To Fall Again

US Gasoline sales have been in structural decline for several years now, as the chart has shown below falling by over 50% since 2005.  After reaching the lows in 2014 gasoline sales began to start rising again as the economy began to gather pace as jobs and debt accumulation began to accelerate. However recent data has shown Gasoline retail sales have once again resumed their downward trend and starting falling as weakness in the economy  from higher rates is started to effect consumer demand.

Federal Government Receipts Now Negative Y/Y - First Time Since Last Recession

Similar to Gasoline sales US Federal Government receipts were growing strongly up to 2014 reaching a growth rate close to 14% y/y. Since 2014 recent high Federal Government receipts have been falling dramatically over the last 2 years, having just recently turned negative falling -1.1% Y/Y for the first time since the last recession in 2008 /9. (See chart below)

Having a closer look at the chart on the right hand side, you will notice that the majority of the decline in growth rates occurred over a relatively short time frame in 2016. This coincides with the similar time frames when interest rates stopped falling and began to rise rapidly in the second half of 2016.

US Restaurant Operators Same Store Sales Falling

The most recent data available for restaurant same store sales has been released, showing that December 2016 same store restaurant sales are the weakest they have been for in 3 years. In addition Q4 comparable sales and traffic is also down from a year ago, indicating that the restaurant industry is reeling as consumers cut back spending out for food.

 Does A Rising Interest Rate Environment Matter To Stocks?

According to history a rising rate environment has serious implications to the future performance of the market. Since the 1970's 7 out of 8 occurrences where interest rates cycles began to tighten resulted in some large corrections in the stock market. With the last tightening cycle resulting in a 56% fall in the markets in 2009.

The tightening cycle has been running for close to 9 months now as has already had a major impact to the grow rates of the economy slowing dramatically over the same period. With the potential for another rate rise occurring this week, its quite possible we could see 3% US 10 year Government bond yields in the coming months playing further havoc on the economy. Based on the last 45 years of data a tightening cycle in the US has not be very kind to stocks either as the economy reacts to higher rates.

Warning! - The Insiders Are Rushing For The Exits

Company executives are selling around 10 to 1 relative to buying trades of company stocks despite record prices for stocks. The buyer / seller ratio is also on a downtrend since peaking in late 2015  and the beginning of 2016 (See chart below)

When executives are selling in such large amounts it usually means they are seeing the writing on the wall for future earnings and prospects for the companies they run. Perhaps since interest rates are rising and the economy is slowing its starting to place pressure on future earnings targets. The next quarter earnings may provide further insights, especially since companies are conducting record amounts of buybacks that are financed from previously low rates of  debt.

The recent strong performance of stocks in late 2016 and early 2017 has masked a serious deterioration in the US economy that started as early as 2014 - 2015. With interest rates about to break out higher on the way towards 3% we could see the last legs of the economy knocked out bringing stocks down with them as earnings will start to fall again with weaker consumer demand filtering through to lower sales results.

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Stocks Bullishness At Record Highs While The US Economy Is Approaching Recession

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Russell 2000 Bullish Run Looks Tired As Momentum Falls

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US Stocks Bullish Run Fueled By Optimism Over Real Data

Since the election results in November US soft data (survey / optimism data) has deviated from hard data (actual US economic data). More importantly since December hard data has been falling as the economic news has deteriorated. Whilst soft data has continued to shoot higher along with a very bullish stock market. 

The Russell 2000 Index (Small Cap's) review shown below will show a very strong bullish uptrend. This pattern is quite similar to the 3 main stock indices DOW, S&P 500 and the Nasdaq. This highlights that the recent market surge in US stocks is more a function of market euphoria and optimism rather than actual improving economic activity and growth within the US economy.

Russell 2000 - RUT (Small Cap's) Chart Review

Monthly Chart

The Russell 2000 (RUT) has been in an uptrend for several years now as seen in the chart below. After a 3 year consolidation pattern of mostly sideways action between December 2013 - October 2016. The RUT index broke out of resistance of 1252 in November last year after the US election result win of Donald Trump, as all indices moved higher.

Currently the RUT has established a new uptrend within its larger long term uptrend shown with the blue line on the chart below. This uptrend started after the index gave a false signal when it closed below support of 1100 back in January 2016. After hitting the lows one month later the index has been steadily climbing.

Momentum Stalling - Consolidation Or Pullback Ahead

Since the RUT has had a strong 13 month rally in prices, the momentum indicators shown in the monthly chart are indicating exhaustion of the current rally.

I have circled both the momentum and Stochastic indicator to show that both are indicating a reversal of the strength in the market. Momentum indicator is still high however has pulled back to 2.80. The stochastic currently is sitting at a bearish cross as the blue line has crossed below the red. The last time the Stochastic had a bearish cross in July 2015 (circled on chart price action) the RUT index experienced a correction in prices for the next few months.

Since its only early March, it would be appropriate to wait for confirmation at the end of the month. If the momentum indicator is confirmed we could see the price action retrace back to the current uptrend shown in the chart at around 1315 - 1320 price range.

Since the bullish rally is quite strong its unlikely we will see a retracement back to support of 1252 - 53 level. Keep this target in mind though if we experience volatility in prices in March. Especially since the FED is likely to raise interest rates by 0.25% this month.

Weekly Chart

The weekly chart is showing a similar pattern to the monthly chart with the strong rally in prices since late November. Currently the price action is at or near the upper band of the uptrend channel shown in the chart below.

RUT experienced a strong burst in price around 5 -6 weeks ago as it made a new record high above 1400. Since then the price has been consolidating as it has struggled twice to climb back above the 1400 resistance level, with 2 weekly rejection patterns shown on chart as the price failed to stay above 1400.

Weekly momentum indicator is showing more weakness compared to the monthly momentum as it has made lower lows as it now sitting at 0.06 after reaching a high of 1.88 a number of weeks ago. This indicates the strength in the market that was present as the price made new record highs has disappeared. This explains the hesitation of the index to move higher.

The weekly stochastic indicator is also indicating exhaustion of the current rally and a consolidation or minor retracement in price is likely in the coming weeks.

The weekly chart pattern is confirming the monthly price action as the recent bullish run is running out of steam at least in the short term for now. Most likely the price action will move towards the lower uptrend channel band around 1300 - 1305 level. Based on the current bullish optimism its unlikely the price action will move towards support of 1282 - 84 level.

For confirmation of the retracement in price on the weekly chart, look for a weekly close below the 10 week moving average line which is currently at 1377 level.

Daily Chart

The daily chart price action as of last Friday's close on the 3rd of March is sitting just above its support level at 1,394. After breaking out approximately 2 weeks above the 1388 level the price action has been moving sideways and above its previous resistance level which is a bullish indication.

Contradicting the price action above the 1,388 level is that both Momentum indicators are showing a loss of strength in the market. Momentum has recently moved negative to -0.02 and the stochastic has also had a bearish cross a number of trading days ago. This means in the short term its likely we will see the RUT index close back below the 1,388 level.

If the index does close below 1,388 level, pay attention that the index stays within the previous sideways range between 1345 - 1,388. If the RUT index falls below 1,345 support level over the next 1 - 3 weeks the next target of support is 1,313.

Wildcard Event

Based on the strong bullish run of the RUT index and the major US stock indices, its unlikely we will see a retracement / fall in prices greater than 10% over the short to medium term time frame. However the FED will be meeting on the 14th & 15th of March to decide whether interest rates are rising in March. The decision will be made on the 15th. Based on prior announcements of a rate rise the market may experience with 1 - 3 days of the announcement a lot more volatility. If this was to occur we could see a mini panic of selling as the market digests the news. Therefore the wildcard this month is the FED announcement in the middle of the month that you should be weary of.

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Telstra Disappoints On Earnings Sending The Stock Below $5

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

On Thursday Telstra reported a 12% drop in its half year earnings ending December 2016.  This took the market completely by surprise and the stock was savaged by investors as it fell 4.5% for the day on extremely high volume.

Telstra which is the largest market cap Telco in Australia is quite popular with retail investors and super funds because of its large dividends paid out annually. The key question going forward is whether investors will still support the stock as it struggles to grow its profits.

Today's chart review of Telstra we look at all 3 time horizons Monthly, weekly and daily charts to determine where Telstra could go next.

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

Stock Review - Telstra (TLS)

Monthly Chart

With just over half the month completed in February it appears that Telstra will close below a key support line of $5 a share. If this is to occur by the end of the month this will be quite bearish for Telstra, as the $5.00 level has previously held up on a monthly chart when the price reached or fell below these levels. Since the stock is trading below the $5 level I have labelled this level of support now as its new resistance level.

Momentum which I have circled in the chart below is currently negative and has been negative for over a year now. This indicates the weakness in the stock since Mid 2015 is confirmed by the momentum indicator as well. The monthly stochastic indicator which is another momentum indicator has also turned bearish again confirming the break of the $5 support level.

If the $5.00 a share support level has been broken and confirmed by the end of February, the next stop for Telstra is $4.50 support on the monthly chart. This new support level is another 34c away from the current price on Friday's intraday price of $4.845.

Telstra Already In Long Term Downtrend Before Profit Announcement

If you take another look at the monthly chart below you will notice that Telstra broke its long term uptrend back in October 2015. Since breaking the uptrend line the stock bounced up and down for the last 18 months, before falling below $5 a share this week.

Weekly Chart

The picture does not improve for Telstra on a weekly chart with the stock failing to move toward the $5.5 downtrend line. Instead because of yesterday's profit announcement the stock has now formed a steeper downtrend line shown along the circle on the chart. If this down trend line holds it would mean that in the short term we could see sharper declines for the stock once the stock has gone ex dividend.

I have circled the weekly stochastic indicator to show that it too has turned down from close to its peak levels. This suggests that the trend has room to move and will continue to decline lower over the medium term.

Moving Average Bearish Cross

Telstra's weekly moving averages formed a bearish cross back in September last year when the 10 week moving average closed below the 50 week moving average. Since this is a weekly chart the moving averages crossing over late last year confirms that Telstra is in a medium to long term down trend phase.

In addition the current price is sitting below both moving averages which is another bearish indicator for the stock.

Just like the monthly chart the next level of support for Telstra  on the weekly chart is $4.50. Failure to hold this level would see Telstra move towards $4 a share. Considering Telstra still has a considerable decent dividend attached to the stock, it would be unlikely to see Telstra move below the $4.50 level without a further deterioration in profits and or dividends.

Daily Chart

Gap Downs On Heavy Volume Never A Good Sign

I have circled on the chart below the big gap lower where Telstra opened at yesterday after disappointing the market expectations on profit. The volume reached just over 118 million shares traded yesterday compared to the daily average of 28 million shares. When ever you see a massive increase above average volume like Telstra achieved yesterday coupled with a big gap down, the prospects for the stock in the short to medium term are usually never positive for the price.

Days before the profit announcement you will notice the stock got close to the $5.30 resistance level but failed to reach it. This was bearish indicator for the stock even before the announcement.

Now that the stock fell sharply the daily chart moving averages have formed a bearish cross as the stock's next support level is $4.70 a share.

Similar to the monthly and weekly chart the momentum and Stochastic indicators have confirmed the bearish move lower as they both are signalling overall weakness in momentum.

Conclusion:

After looking at all 3 charts above, there is no positive or bullish indicators for the stock on any of the time horizons. With the most likely direction for the time being to continue to head lower to the next level of support. The only bright spot for the stock outside of the chart is the big dividend that now looks more appealing if the stock can sustain the dividend over time.

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Whos Winning In The Aus Large Cap Healthcare Sector CSL vs Ramsay

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US stocks are at or near all time record highs across all major indices, with the markets bursting out after the election win of Donald Trump back in November 2016. Since then investor bullishness has also spiked to 10 year high levels. While this bullish euphoria is occurring something else is taking place far more important. The US economy has been trending down for some time now and the slowdown momentum is gathering pace as it moves closer to a recession possibly as soon as this year.

Market Euphoria Clouds Judgement

The markets have a history of becoming totally blind to whats actually occurring in the real economy, instead focusing on the direction of the market to give them an indication of whats taking place. In the chart below you can also see that the composite bullish index (red line) back in mid 2007 was very high around 130 just before the markets began their 50% decline.

Currently the market greed / fear index (see chart below) is close to at the maximum level of extreme greed side, while the actual economy is rapidly declining with a similar dynamic playing out presently with a potential twist to the market outcome.

How Can The Market Be At Record Highs While The Economy Is Heading Towards Recession?

In a nutshell the answer is Central Banks, if you take a look at the chart below you can see how the Central Banks have massively increased their balance sheet since 2008 / 2009. This has been achieved by printing money and buying up assets to provide additional liquidity into the system. This extra liquidity has flowed its way into stocks all over the world, regardless of which Central Bank has been been providing the additional liquidity.

Recently though most Central Banks have once again picked up the pace in growing their balance sheet . So even though the US has effectively kept their balance sheet flat to slightly down over the last 2 years, the other Central Banks have effectively been adding to the pool of global liquidity pushing up prices of stocks, real estate and other assets. Clearly this practice is totally artificial and is giving false bullish signals to investors as the markets are not functioning on their own.

The S&P 500 Index No Longer Tracks Earnings

Further evidence that the Central Banks actions are providing false signals to the markets is shown in the chart below. S&P 500 earnings per share (EPS) are totally out of sync with the rise of the market and now represent a large divergence in their trends.


Earnings are now slowly tracking higher after falling for several years, however this is more a case of financial engineering of companies artificially raising their EPS by buying back their stock usually with debt. Since 2012 corporate profits are down so even companies themselves are misleading investors to the true financial health of their investments.

How Lower Corporate Profits Tie In With The Economy - Jobs, Jobs, Jobs

Since 2016 global employment in S&P 500 companies has been slowing down (see chart below) and late 2016 turned negative as the slowdown accelerated with employment growth. The last time this occurred the US economy went into a recession shortly after.

If you look at US non-farm payrolls you will notice that its also trending down but a slower pace.

The interesting point about the non-farm payrolls data is that the data each month is provided based on the combination of a Government surveys (small sample) as well Government generated predictions of jobs, Ie Birth death model of estimated new businesses commenced to produce the monthly result. Several months later up to a 1 year later the actual data collected from companies are imputed and adjustments are made on prior months. Usually the number of jobs actually created is readjusted lower. So the true effect of a slowdown with companies in the S&P 500 will not show in the non-farm payroll data for several months.

Every Time The FED's Own Signal Falls Below Zero Y/Y A Recession Occurs

Scroll video to 12min 52sec.

This video indicates that an indicator that the FED actually monitors has fallen -0.3 in December and has fallen 5.8% y/y, which is the largest since 2010. Each of the last 8 occurrences of this indicator falling below zero y/y has resulted in a recession in the US.

Consumer Credit Grow Demand Drops 43% Month on Month

In December consumer credit grew by $14.2 billion  a 43% drop compared to November's $25.2 billion. Since consumer spending makes up over 70% of the GDP data and the savings rates is falling in the US, a large drop in the amount of new credit card debt also points to a slowdown in retail sales.

The credit data below is actual data collected from the banks rather than from surveys, so it shows a very accurate picture of demand for credit card debt. Given the big collapse in S&P500 employments levels the trend in credit demand will likely continue to move lower and lower the GDP result.

FED Senior Loan Officer Survey Demand Falls Over

The overall trend for credit demand going forward is not looking good with the latest results from the FED senior loan officer survey. Indications for demand for debt for Construction, credit cards and auto loans are all down at multi year lows.

This is important as credit demand overall has been tied to overall demand within the economy and especially with consumers. If the intentions from the survey follow through, the slowdown in the economy will begin to gather pace with the higher probability of the US starting a recession in 2017.

Auto sales have performed very strongly since hitting the lows in 2009, with demand for auto loans driving a large proportion of retail sales demand. Auto sales have recovered strongly also because interest rates for auto loans have fallen substantially over the last 7 years from the FED dropping interest rates and pushing down bond yields via QE purchases. This has allowed buying a new car more accessible for consumers and allowed consumers to own more expensive models that previously they have not been able to afford on higher interest rates.

Auto sales Decline Y/Y First Time Since 2009

The strong performance of auto sales bubble appears to be over as December and January figures have been very weak. Making things worse y/y auto sales have recorded its first decline since 2009 the same year the US experienced a recession.

The data below shows the big 4 car companies in terms of autos units sold all experienced declines in y/y figures. Since the FED senior officer survey results for demand for auto credit is also falling, US car sales declines will  most likely continue in 2017.

With Record Amounts Of Stimulus Why Is The US Economy Weak?

Each month the Government releases the wages growth figures and overall they are usually positive rising slowly over time. The data that the financial media show is the data in the chart below (red line) which is nominal growth in wages. Since 2000 nominal growth has risen 40.2%, however when you take into account inflation real wages have declined 1.1% over the same period.

When the Government calculates inflation, the data they release is usually under reporting the true state of inflation due to various statistical measures like hedonics applied to the data to bring the level of actual inflation down. Therefore the average workers real wages have probably fallen by more than 1.1% since 2000.

Since the average worker has to spend more of their wages to buy the same amount of goods and services, this impacts on their spending power and ability to borrow. Lower spending and borrowing capability translates to weaker GDP growth since consumer spending makes such a large proportion of the calculation.

Weaker Economy = Higher Bankruptcies

The 2009 US recession caused bankruptcies to rise for several years and after peaking in 2011 the overall trend in bankruptcies continued to decline for the next 5 years as the economy recovered from record stimulus implemented by the FED and the Federal Government.

The declining trend has shifted when bankruptcies began to surge in November 2015 and continued to move higher in 2016. This has resulted in bankruptcies recording their first y/y rise since 2010 after rising 26% from the prior year.

Given bankruptcies is a lagging indicator due to the time required to process and complete bankruptcies, the deterioration of the economy has been occurring for an extended period of time now. Since other economic data  is showing further weakness, bankruptcies will continue to rise further in 2017 and into 2018.

Stimulus High No Longer Effective

Despite continuous stimulus of some form or another from Central banks and the US Federal Government growing their debt levels at record pace, the 2016 GDP growth came in at only 1.6% matching the 2011 low read after hitting 2.6% growth in 2015.

Based on the actual data from the US Government, the economy is slowing and no longer receiving a boost from the various stimulus options in place currently to support the economy, consumers and businesses.

Whilst the economy was slowing in 2016 another setback for the economy occurred in November last year, when the US 10 year Government bond yields soared over 0.60% within short period after the US election results.

Given the majority of consumer and business debt products interest rates in the US are priced from the 10 year Government bond yield rate, consumers and businesses effectively experienced two 0.30 rate rises over a 2 month period in late 2016. To view the article written back in November outlining the impact of higher Government bond yields on the US economy click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

A Rising Stock Market During A Recession Is A Possibility

After viewing this article you might come to the conclusion that despite the stock market sitting at record highs in the US, stocks are set to fall if an imminent recession is arriving in 2017. Well not exactly, since we are not in normal times and the actions of Central banks and the US Government are unprecedented.

When you take into consideration several of the previous FED QE programs occurred after US stocks began to correct by around 10%. In addition the odd market behavior in stocks over the last 6 - 12 months where we have not experienced a fall of greater than 5%. Its a reasonable possibility that stocks may stay elevated or even rise higher even if the US has an official recession. If this occurs this will be another new record in US history.

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Whos Winning In The Aus Large Cap Healthcare Sector CSL vs Ramsay

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

CSL (CSL) Chart Review

CSL Continues Along Long Term Uptrend Towards Record Highs

CSL has experienced a phenomenal run in its share price over the last 5 years as the stock has been able to consistently grow its profits and dividends under its previous CEO who retired last year.

The stock has risen from around the $29 a share mark back in late 2011 to an all time high of around $118
last July. This equates to an approximate 300%+ return over the 5 year span outperforming the local Australian index XJO considerably over the same period.

False Break Of Up Trend

Last November and December was a nervous period for CSL shareholders as the stock had been under a succession of monthly declines after reaching the highs set in July last year. Back in November it appeared the stock had closed below its long term uptrend which was a potential signal to sell based on the chart trend lines.

December trading in CSL initially followed on from its dismal performance in November as it experienced steep losses early in the month indicating that CSL was about to confirm a clear reversal and break its up trend and support level of around $98. However a surge in buying support in the second half of December, saw the stock completely reverse its losses for the month and finish slightly higher on the month. Since it respected $98 support and its trend line it provided a strong bullish signal based on the monthly price action.

January Follow Through Buying

The bullishness continued into January for CSL as the company had made an announcement of a profit upgrade on previous estimates provided by the company. This sent the stock soaring and finished the month at $112.30 on heavy volume, which is another strong bullish sign.

Based on the strong buying support in December and January and momentum rising supporting the rally, CSL is bound to reach its previous all time highs of $118 in the short term.

Note:

Watch the price action over the coming months for a potential reversal to its $98 - $98.50 support level which would signal a break of its 5 year uptrend. This outcome though has a very low probability based on its bullish indicators and price action.

CSL Weekly Chart Review

CSL Confirms Reversal & Close Above Down Trend

The weekly chart below gives a better indication of sharp V reversal of CSL share price in December, as well as the spike in price in January shown with the most recent long blue candle.

I have circled the area where CSL had closed above the down trend. This was the first signal of a change in sentiment for the stock and direction. If you notice the volume once the reversal in trend occurred was not accompanied by an uptick in volume due to the holiday period so the move could not be relied upon for confirmation. However the volume exploded shortly after in January after the company announcement of a profit upgrade over its original estimates came out.

The recent strong performance of CSL in the last few weeks allowed it to comfortably close above the $107 support level as it now heads for its previous high and resistance of $119 a share. However a failure to hold above $107 on a weekly basis will result in CSL heading back down to the $95 level on the weekly chart.

The weekly chart technicals of CSL are very bullish, with both momentum and stochastic showing strong support for the move higher. In addition the above average volume is also supporting the bullishness of move higher. The most likely move for CSL after reaching the $119 level in the short term, is to make an attempt at a new all time high after a potential brief consolidation at resistance.

Ramsay Healthcare  (RHC) Chart Review

Ramsay Healthcare like CSL had also experienced a large move in price over the last 5 years as the stock appeared to mirror CSL's performance over the same period. Ramsay went from around $19 a share in late 2011 to a high of $84 a share reached in September last year producing an impressive 340%+ return over the period. Slightly beating CSL same time frame performance.

Ramsay Breaks Its Long Term Uptrend

Once Ramsay made the new all time high in September it begun to fall in price following a similar path that CSL had experienced in the second half of 2016. Compared to CSL which was able to respect its 5 year uptrend in December, Ramsay has continued to move lower in December and January. In doing so Ramsay has confirmed a reversal of its long term uptrend in January as it closed below its support level of $68 a share.

Next Stop $56 Support.

Based on the confirmation on the monthly chart closing price in January, Ramsay next move lower is towards a previously strong support level of around $56 a share. Initially over the coming weeks and months. We may see the price move towards its previous support level of $68 though in the short term before it moves lower to its next support level.

Note:

Just like CSL if Ramsay was able to receive some material positive news on the company in the interim we could see the stock reverse the close below its uptrend and support level of $68. If this was to occur a close above its previous long term uptrend on a monthly basis would confirm the move.

Apart from any material news from the company, based on the chart technicals and momentum trending down the performance of Ramsay in 2017 will be weak.

Weekly Chart Review

The weekly chart for Ramsay does not provide much change in sentiment and analysis compared to the monthly chart. I have circled the key pivot points for Ramsay recently and resulted shift in trend as a consequence.

The stochastic indicator though is showing a divergence to the direction of the price action, however since its a lagging indicator provided the price continues to fall lower the stochastic indicator will reverse in line with the trend.

If the price in short term was to close above $68.50 on a weekly chart we could see a potential test of the $81.30 resistance level. A move that based on the price and momentum indicator trending down on the weekly chart is unlikely to occur.

The Final Verdict

After reviewing both large cap healthcare stocks recent price action on a monthly and weekly basis, its clear that CSL is clear favorite to outperform in 2017 over Ramsay Healthcare. If CSL's management had not increased its profit estimate last month, CSL could have easily found itself mirroring the sentiment and direction of Ramsay.

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.