"At your convenience could you please comment on the unprecedented rise of AUSSIE BANK SHARES?
"With 100% Franking credits only available to AUSSIE Investors, because of our tax system & rules, Dividend Yields grossed up are still 6-6,5 % but for Foreign Investors yields are now down to 4-4,5 %. It smells like a bit of bubble. What do you think?"
David Fuller's view Thanks for a question that will be of
interest to many investors and is also relevant for the second email below.
The S&P/ASX 200 Finance Index (weekly & daily) is overextended relative to its 200-day moving average so it is technically overbought in the short term but it is not much of a bubble at this stage, in my opinion. I would expect a reaction and consolidation before long, which you last saw in May from a similarly overextended position. This could take place in the form of another sharp reaction towards the MA, or this time it may be a more rangy pause as sometimes occurs when confidence is improving. This would allow the MA to catch up over several months of consolidation prior to the next advance. However, if no lengthy reaction and consolidation occurs and AS51FIN pushes back above 7000 with little more than brief pauses, then it would look like a bubble.
Interestingly, the overall recovery pattern looks like a V-bottom with a lengthy right-hand extension, as taught at The Chart Seminar, which did not breakout above the 2009-2010 highs near 5000 until this year. I appreciate that bank yields have come down but they have gone from being exceptionally attractive to still good value relative to government bond yields.
Lastly, note how in the last bull market the biggest upside overextensions relative to the MA occurred in 2007, in which the AS51FIN churned for most of the year, losing all uptrend consistency before collapsing. The most difficult part to assess was the move to another new high between October and November 2007, but it could not hold that gain and it had previously lost its primary uptrend consistency characteristic which was the multiyear progression of higher reaction lows. What followed were two downside overextensions relative to the MA in 2008 but these could not hold. The March 2009 low looked climactic by any definition and was confirmed by the mid-year consolidation in a narrow range, before the recovery resumed and became quite overextended relative to the now rising MA in October 2009. Additionally, there was another dowside overextension in August 2011 which was followed by higher reaction lows, indicating that demand was regaining the upperhand.