There are certain trades in the market that have caused so many losses, they get called a ‘widow-maker trade’.
Shorting US bonds has been the classic widow-maker trade of the last few decades.
Another one would be trying to short Aussie banks!
They used to do nothing but go up, and even though banks have struggled for the past decade, the S&P/ASX 200 Financials Index [ASX:XFJ] is still close to its all-time high.
Commonwealth Bank [ASX:CBA] has done the heavy lifting and remains close to its all-time high, whereas Westpac Banking Corp [ASX:WBC] has been in a steep downtrend for eight years.
So there’s a lot of variation within the sector, but on the whole, trying to short the banks has been a difficult trade to make work.
That’s why I rarely contemplate suggesting that the financials might be a valid short trade.
They make up such a large part of the ASX 200 that there’s always a large amount of buying demand from index-hugging funds.
But every now and again, a technical set-up will come along that piques my interest.
The monthly chart for XFJ and the individual banks are all looking rather precarious to me, and a little more selling pressure could set off a chain reaction to the downside.
Interest rates continue to ratchet higher, and we’re starting to see some cracks appearing in the property market. Mortgage broker Lendi just announced that it’s firing 100 people from the business, due to changing market conditions and the time taken to sell a property is increasing.
There has been a lot of chatter about the coming mortgage cliff as fixed rate loans roll into variable rates at much higher levels. The higher interest rates move, the more pain will be felt when that rollover occurs.
Where the Australian property market goes the banks will follow, and the charts are saying that the financials are on the edge of heading south.
The S&P 500 is also flirting with its 200-day moving average, and I fear that selling pressure could pick up steam below there.
I show you all of the key charts in the Closing Bell video above.
Until next week,
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Murray Dawes,
Editor, Money Weekend
