Off the back of climbing annual profits for the four major banks announced over the last week and the RBA raising rates this week, we are likely to hear a lot of hot air, noise and opinions about how banks operate and whether they are justified in hiking rates above the RBA level. I am not an expert on fundamentals nor the operations and day to day running of a major bank - I think that places me in the category of most people on the street.
We can complain and deride the banks, we could even move our home loans or banking services around, that being said banks rely on the apathy of individuals - to get angry, but ultimately do nothing - and so the story goes.
So in thinking what could I offer to the debate on top off "that's not fair" would be to look at the technical position of the major 4 banks and see if there are clear performers or underperformers.
One of the most common tools used in technical approaches is a moving average calculation. Essentially, it is a lagging indicator that averages prices to smooth the effect of price volatility and provide a clearer picture of trend. If we take a look at the XFJ (finance sector) we see it's been bouncing around its 200 day exponential moving average.
There are a variety of moving average calculations and this one happens to be my preference but all will tell a similar story. There is no wonder our market has been lurching sideways as one major sector of the economy and large representative of the index grapples with which direction it wants to head.
Another basic tool is a measurement of volume of trades, the relevance of using of volume has been argued for as long as it's been measured. The argument is that an increase in volume when a market moves higher or lower could be a hint of the strength or weakness of the move.
Though useful, my view is that it cannot be used as a standalone system. To counter this concern smarter people started to derive more detailed indicators and calculations to incorporate price movement and volume. Once again with the hope it helps confirm or signal future direction.
One of the more popular indicators is called the accumulation and distribution index developed by Marc Chaiken. It's designed to assess money flowing in our out of a security. When look at the XFJ we see that by its reckoning money is flowing out of this sector. We have a condition known as divergence as the price action rises and the AD index falls. Ultimately, one of these will be proven right but when combined in a system this can be put to good use.
In the case of the major four banks, all the AD index lines are declining suggesting money is flowing out of these securities, also the only major bank clearly above the 200 day moving average is ANZ with NAB running second. CBA is sitting under and its decline as been in line with the AD index so they are sympathy.
This style of analysis can provide some insights as to when to invest and which assets may represent the best choice, that being said having applied a technical approach to markets for many years we can see long periods where divergence can become normal, and, like fundamentals, it can take a while for the balance to swing back.
My view is that these four banks will be major talking points and potentially good trading vehicles over the coming months, it might pay to ignore the emotional and focus on the technical.
Are the big banks heading higher or lower?
Good Trading
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