Our market is expected to start the week lower. The U.S on Friday continued their selling, and our market will simply follow suit. U.S futures are mildly in the green this morning.
On Friday we managed to retake half the intraday losses by close. This morning, we should retest Friday’s lows with an open near 7,920 (at time of writing). The bulls remain optimistic, and likely see the recent selldown, led by an overheated U.S, as healthy profit taking and mean reversion. A month ago, we would have met U.S selling by falling out of bed, but since the breakout of the broad pennant, the bulls seem firmly in control.
7,900, the previous all-time high key resistance, is now the next key level of support for our market. We got within arm’s reach of it on Friday and will likely retest it this morning. It seems reasonable enough to suggest our market has indeed reacted and confirmed the previous all-time high as the key support, despite not reaching that point exactly. In the face of continued mild selling from the U.S, and bullish optimism underpinning our market, we should continue to hold these levels. However, of course, any serious selling will likely extinguish the recent flames of hope and lead to heavier falls.
At this stage we should assume the market will continue higher, albeit with potential spats of consolidation. Up trends are characterised by higher peaks and troughs. Indeed, sustainable trends have pullbacks to reaffirm them. We should take the recent selling as exactly this – for now.
The macroeconomic environment in the U.S remains favourable, as their key readings continue to land in a goldilocks range – their economy is cooling enough to warrant rate cuts this year, but not cool enough to spook fears of a large recession. They are in a position where they can have their cake and eat it too.
Our market on the other hand is not in the same position. In fact, we are heading towards stagflation – with little GDP growth, and CPI that will not budge. Our latest unemployment reading on Thursday came in as expected at 4.1% (up from 4%), showing we are still at full employment.
If CPI does not ease, the RBA will be forced to raise rates again – a fact they have not shied away from expressing in their last few key announcements. This puts our market in a very different macroeconomic environment to the U.S. It is the push and pull or our market trying to keep up with U.S bullishness, whilst knowing that it does not have the chops to justify these prices, that kept our marker rangebound for so long. Now that we have broken higher, we have joined the party, but things have not really changed on a macroeconomic level. This could end in tears if our market sobers up to reality. On the other hand, our market could fake it ‘till it makes it. If we start seeing our inflation ease at a quicker pace, the recent bull run will be vindicated.
The week ahead is fairly quiet for key macroeconomic data releases. The largest news is likely to be U.S GDP numbers on Thursday night.
US Markets
US shares closed lower on Friday, as investors continued to take profits off the table. There wasn’t a big negative event to drive markets lower, and instead the short-term downwards momentum continued. It was the third day of selling for US markets and comes after a period of serious upwards movement. In general, US markets have everything they could ask for, with inflation coming under control and with interest rates likely to be cut soon. However, given how much prices have rallied, and how elevated valuations are, profit taking shouldn’t be unexpected. US markets also continue to report earnings this week, which could have influence on overall market movement; earnings will need to be strong to justify current high prices. Finally, this morning it was announced that President Joseph Biden will not contest this year’s Presidential election, and it seems that US futures are reacting positively to this.
Only two of the eleven sector groups of the SP500 closed higher on Friday, with Healthcare the only sector with notable gains. Energy stocks saw the most selling, followed by Technology and Financial stocks.
Technically, the SP500 remains in an overall uptrend, but it has now pulled back towards the trend line, and potential support level around 5,500 (the previous all-time high resistance). Should that level hold (and we expect it will), we will likely see a continuation of the trend and a higher peak. Should 5,500 break, we could see a move all the way back towards 5,250.
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Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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