While it’s felt like a roller-coaster ride to those of us who follow the markets daily, the last three weeks have set up a trading range in many stocks.
CBA is no exception. The broad boundaries of its trading range are admittedly pretty wide. They extend between about $77.50 and $71.
There are many different views about what’s caused recent market volatility. Whatever the cause of these market gyrations, volatility is a symptom of collective uncertainty. Portfolio investors have lacked conviction either as buyers or sellers except at the boundaries of the range.
In the meantime, changes of direction have come quickly and prices have moved between the highs and lows in fast swings of about 8 or 9 per cent.
Based on valuations, my bias is that the most likely direction of the eventual break out of this range will be to the upside. Similarly, the most interesting opportunities for investors in CBA might be new opportunities to buy at the bottom of the range or, even better, on a minor break below it.
My upside bias is not blind to the fact that the Australian banks face headwinds. Growth stocks they are clearly not.
These headwinds include:
The likelihood of increased bad debts. Debt provisions can really only go one way from here. They are not going to get any better than the very low levels the banks have recently enjoyed. The potential for a cooling property market threatens increased risk.
The need to raise more capital, which will further dilute investor returns.
The struggle for revenue growth as investor borrowing for property cools and business investment remains cautious.
The competitive threat from disruptive technology.
However, there are offsetting factors and it may pay not to get excessively gloomy about the outlook for bank profits. These offsetting factors include:
The resilient job market. The fact that trend unemployment rates are holding steady should keep any increase in bad debts pretty limited.
The potential for improved margins following recent increases in interest rates on investor loans.
Tight cost control by bank management.
The ongoing stimulatory economic impact of the weaker Australian dollar and lower interest rates. Though things might be rocky for a while yet, the medium term economic outlook should be good enough to support a steady, low growth outlook for bank profits.
These headwinds and balances are reflected in consensus growth expectations for CBA. The average expectation of 15 analysts surveyed by Bloomberg is for CBA’s earning per share to decline 1.3 per cent in F16 but to grow 4.1 per cent in F17.
CBA closed yesterday valued at a multiple of about 13.7 times forecast earnings. This is down from a peak of about 17.25 times earnings earlier this year. Its prospective dividend yield is about 5.7 per cent before franking credits are taken into account. With a steady profit outlook, downside from these valuations is should be limited. CBA chart
The late August and early September lows in CBA were at about the same level. This is the classic 're-test’ behaviour that can set up a double bottom formation. Leading into this situation, the trend lows had been well below previous ones while the upward corrections had been minor. These are the hallmarks of strong downward momentum.
Now the market has changed character. Sellers were unable to push below a retest of the previous low. From here, a clear break above the double bottom resistance would complete the double bottom pattern and would be a bullish chart indicator.
However, this pattern may not be a double bottom. It’s looking increasingly like it might be a triangle or wedge pattern as described by the blue lines on the chart. In this scenario, CBA could fall to make a third and perhaps fourth retest of the blue support line or levels slightly below it.
This scenario might provide potential buyers with an opportunity to buy around CBA at around $70-71. At this level, CBA would be trading on a multiple of about 12.8 times forecast earnings and a prospective dividend yield of around 6 per cent. If there are more bounces off the wedge support, then the wedge resistance line will the one to watch to complete a bullish break out of the pattern.
The bearish chart scenario would be a clear break below the wedge support zone. Pattern followers would be bracing for another leg to the downside if that happens. Technical and fundamental analysis by Ric Spooner, Chief Market Analyst at CMC Markets @ricspooner_CMC
CBA Price at posting:
$75.59 Sentiment: Sell Disclosure: Not Held
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