The XJO is expected to open flat this morning. The U.S had another strong night of falls, which were heralded by their futures yesterday. Our muted open likely indicates that we had already priced in their expected falls during our session yesterday. Furthermore, their futures have moved strongly in the green this morning. This could spur a relief rally this morning, which is well due considering our market has fallen roughly six per cent in two days.
It is healthy for bull markets to “correct” – although the aggression of this pullback is concerning. Corrections are typically regarded as a ten per cent fall. This would put our market at roughly 7,300. Whether we will correct is hard to know, especially considering there is plenty of support on the way down to 7,300. However, other markets are also looking tumultuous and the global contagion my not be contained. Japan for example had its worse day of selling in its history yesterday.
The speed and severity of the past few sessions of selling is likely due to how unnecessarily bullish markets have been so far this year. Keep in mind that our market is expected to earn less this year than last year, yet our shares have traded significantly higher in price.
It seems markets simply needed some sort of trigger to turn things lower, which came last week with a surprise rate rise from the Bank of Japan, and with a rise in US unemployment.
Whether or not our market stablises here or keeps selling will likely come down to movements overseas, though we could also see some movement with today’s RBA meeting. Though the RBA is not expected to change interest rates, Australian investors will look for any clue as to whether the next rate move is up or down.
Technically, our XJO is back around some support at 7,650. There are additional levels of support at 7,600 and 7,500 if we continue to fall. Should we see a rebound here, the first upside target would be 7,700.
US Market
US shares fell strongly overnight, with big falls across each of the three major indices. Prices did open strongly lower, but they bounced a little throughout the session to close above the opening levels. The VIX volatility index surged in the US, registering its biggest one day spike since recording began in 1990. Selling started hitting late last week with two key events. The first being a surprising bank of Japan rate rise, which some worry will hurt the Japanese economy (just as it seems to be making some strides after a long period of stagnation). The second being the US unemployment data on Friday, with unemployment jumping by more than expected, worrying investors that rate cuts might come too late and that the economy could be headed to recession this year or the next. Regardless, the severity of the falls can also be ascribed to how unnecessarily bullish markets had been this year.
All eleven sectors of the SP500 closed lower overnight, with every sector seeing notable selling. Technology was the worst performing sector while Communications and Discretionary each saw more than three percent drops.
Technically, the SP500 broke below the potential support at 5,250, before bouncing to test this level as resistance (it held as resistance). Its hard to say where the index will head from here. Should it jump back above 5,250 tonight, we could see a relief rally. Should we see a red close tonight, that could indicate a drop back towards the 5,000 point level and the 200-day moving average.
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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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