The ASX200 surges over 6000. Now what?

James Gerrish

The ASX200 roared over 6000 on Melbourne Cup Day. The question is: “Have fund managers and “shorts” finally capitulated to the market's strength on Cup day creating a short-term top?”

Cup Day’s strength really felt like some forced buying of the overall market was present, along with the obvious impressive gains within the resources space e.g. BHP +3.9% and Fortescue (FMG) +4.8%. However, it must be noted that low volumes typically exacerbate the strength.

However, we are very conscious of several seasonal factors at play as we move into the typically volatile and weak November.

Seasonal weakness for CBA

Firstly, the statistics are amazingly consistent for CBA in November, with very little deviation, especially since the GFC when the market including CBA has been rallying.

  1. CBA’s average pullback at one stage in November over the last 8-years is -6.1%.
  2. The smallest correction was -3.2% but in 2009 and 2011 the pullback was over -10%.
  3. On average if you sell around the 12-14th and buy back around the 22nd you’ve added solid value to your portfolio.

This clearly throws up the opportunity for switching between our banks this month, especially with succulent dividends on offer. So far, this November the numbers for CBA are boring as we approach the “classic” sell window:

· CBA is up 0.7% to-date this November.

· CBA is $1.16 below its October’s high of $79.36.

Hence at this stage, we see 2 obvious conclusions:

1. There is no risk / reward reason to buy CBA at this point in time.

2. If CBA rallies towards $79.50-$80 over the coming days there are plenty of reasons to be a seller.

Commonwealth Bank (CBA) Daily Seasonality Chart

Seasonality for the wider market

Secondly, the statistics are also very persuasive when we look at the ASX200 around this time of year:

1. Since the GFC at some stage in November the ASX200 has experienced an average -5.3% pullback with the smallest retracement being -2.8%.

2. The correction usually lasts ~11 days and typically commences around the 10th, i.e. Friday.

The ASX200’s rally over 6000 is very impressive on a broad participation level which can be illustrated when we consider where some of the markets heavyweights were trading back in mid-2015 when we previously tested 6000:

  • CBA was over $96 and is at $78 with other “big 4” banks similarly lower today.
  • Woolworths (WOW) was around $30 and is at $26.11 today.
  • BHP was over $30 even after yesterday’s strong rally its still under $29 today.
  • Telstra (TLS) was well over $6 but as we all know it’s ~$3.50 today.

Back in mid-2015 the market valuation was very stretched on 17.5x forward earnings compared to 16.5x today. While this is certainly expensive compared to the historical average of 14.4x it does allow further “wriggle room” to generate a huge sell signal.

In summary

Hence overall, we remain bullish but considering the seasonal statistics for this time of year believe it’s prudent not to chase the current strength.


About this contributor

James Gerrish

James Gerrish

jgerrish@shawandpartners.com.au, Market Matters / Shaw and Partners

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

Expertise

ASX:CBA ASX:FMG

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