Icarus Signal New Entries For Today: Big Four Banks

Daily update on share prices and consensus price targets.

By Rudi Filapek-Vandyck, Editor FNArena

Sector analysts at JP Morgan summed it up succinctly this morning: shares in Australian banks have appreciated noticeably in the first three months of the year, supported by a variety of factors, but this still hasn't changed the low growth outlook for the sector. This, the analysts suggest, is likely to become an increasingly important feature as share prices are now back at levels they consider "fair value". A feat not seen since nearly twelve months, recall the analysts.

Sounds like we have a problem at hand. While the upcoming local bank reporting season will reveal some new insights and thus "may provide a catalyst for more stock-specific performance divergence", JP Morgan analysts remain of the view that from a pure fundamental perspective (earnings growth) there seems no justification for Australian bank shares to move much further into "expensive valuation" territory.

JP Morgan thus suggests a "performance ceiling" is likely to kick in, and soon.

Subscribers to FNArena could have easily drawn a similar conclusion by keeping an eye on FNArena's Icarus Signal. Last week, ANZ Bank ((ANZ)) shares surged above consensus price target (as pointed out at the time) and the shares have retreated back below target since. Admittedly, I anticipated they would remain above target while the rest of the pack would equally close in on their targets. At least the second part of my prediction proved correct with CommBank ((CBA)) and Westpac ((WBC)) moving within 2% and 2.9% respectively of their consensus price targets.

I can only agree with JP Morgan, it's getting rather topsy turvy out there, but market sentiment is an odd beast and there's no guarantee prices cannot add that extra push higher. History suggests it's not that uncommon for bank shares, once they rallied into this position, to first waver and retreat a little and then make that extra push higher, which subsequently makes them too expensive. This then leads to the inevitable "correction".

For those readers new to my analysis of bank shares and price targets, note this personal market indicator was once dubbed "the never-fail indicator" and one of two e-booklets that comes with a paid subscription contains a more in-depth explanation of the how and why and when. Suffice to say I think it's time to start paying attention. My personal indicator has just made a come-back!

Note that I left out National Australia Bank ((NAB)) shares that are still trading more than 7% off their price target. This is because NAB has now become the perpetual laggard among the Big Four in Australia and of little use as far as our warning signal for "market sentiment" is concerned.

Talking about investor sentiment, UBS's in-house indicator for global investor sentiment is indicating markets are once again approaching an elevated level of optimism and risk appetite, with history showing the UBS indicator can yet move higher still. And that's exactly what the three banks above are indicating too: sentiment is a bit hot, but it can get hotter still.

I am in agreement with JP Morgan that there is no fundamental justification as to why these bank shares should surge above their targets, and stay there too.

Meanwhile, Icarus Signal is providing its own examples of significantly increased risk appetite with 62 companies on the Australian Stock Exchange now trading above consensus target and 43 others within 3% of their target. Companies seemingly approaching "performance ceiling" (happy to repeat a well-chosen description) include QBE Insurance ((QBE)), Amcor ((AMC)), Invocare ((IVC)), Seek ((SEK)) and Telstra ((TLS)) while companies trading above target include Sigma Pharma ((SIP)), Wotif.com ((WTF)) and NRW Holdings ((NWH)).

I am going to state the obvious: time to reflect, to pay attention and maybe to retreat to the sidelines and observe further developments. While none of the above provides us with any guarantees, history strongly suggests we're in the final stages of this share market rally. A pull back, at the very least, should be on the agenda in the not too distant future.

This, of course, doesn't solve the underlying problem that, as things are right now, there simply is no fundamental reason as to why bank share prices should appreciate much further. What does this tell us about expectations for much higher levels for the ASX200 in the year ahead?

Investors should consider the information and data are provided for research purposes only.

Stocks <3%>