The XJO is expected to edge higher on open this morning.
On Friday we broke higher, making fresh all-time highs. The U.S followed suit in their session Friday night and their futures are flat this morning. Their market has consistently dog-legged higher, so it is good to see our market finally have the courage to share in the gains.
In fairness, much of the U.S gains are represented in their top handful of stock, and they are well represented by tech. Our market on the other hand, is overrepresented by financials and mining, the latter of which has been lamenting with falling iron ore prices. The financials have kept us elevated, but it was the materials rebounding on Friday that helped drive our market higher.
We broke out of the ascending triangle, and so we should expect a continued move higher. However, things remain tentative. The financials are well overbought and due for some mean reversion and profit taking. If we see a rotation of funds from the financials into the miners, it could spell subdued movement overall for our index as the two largest sectors work again against each other. Indeed, that is precisely what we have been seeing the past month or so, but in reverse. However, if the financials can at least hold ground, and we see a continued rebound in the miners, our market should make further gains.
7,700 is now support. With our expected muted open, 7,750 seems likely to be the new resistance (though how strong it is, is yet to be proven). The uptrend line comes in at roughly 7,600 to 7,650, and the 50 day MA comes in just below 7,600. If we do see a retracement, these are good targets.
Finally, over the past 24 months, markets have been very data dependent, as the dominating narrative continues to revolve around central banks and monetary policy. If data comes in stronger than expected, then it means rate cuts are further away. This is largely what we have seen from the U.S this year, and though the likelihood of rate cuts being pushed further out would be considered negative for markets, the U.S has maintained its strength and continued to make fresh highs. Why is hard to pinpoint. Their momentum is largely carrying them, so they will see good in any data release. Right now, the “good” is that if data comes in stronger than expected, it means the Fed may actually deliver the promised “soft landing”.
Our market has reluctantly followed them higher. We have had to overextend on the banks and a few other key stocks just to keep up. We are also likely in a different monetary policy position as our data has not been as strong as the U.S. For example, last week we revised our retail sales numbers significantly lower. Inflation and employment remain sticky, but there is a stronger argument for a rate cut here than in the U.S. However, we are unlikely to act alone and instead will wait for the U.S to move first.
It’s a big week ahead for data. Tomorrow, we have local PMI data, followed by U.S PMI data tomorrow night. On Wednesday, we have local GDP numbers and retail sales numbers. GDP is expected to contract by 30% compared to same time last year, showing the effects of higher interest rates over the past 12 months. Retails sales numbers are expected to rebound, though the last reading was terrible at -2.7%. On Wednesday night, the U.S has non-farm employment data. Powell is set to speak both Wednesday and Thursday night. He will likely keep a stance of “we will see” – which the market will likely ignore. On Thursday night, the ECB has an interest rate decision where it is expected to keep rates on hold. To finish the week, on Friday night the U.S has further employment data, with unemployment rates projected to remain sticky at almost full employment.
US Markets
US shares closed at fresh all-time highs on Friday, with strong gains in technology stocks driving the SP500 and NASDAQ to their highest ever closes, while the DOW JONES is still a little way off its all-time high. Prices mostly continued higher with the recent momentum, with strength being bolstered by data from Thursday which showed PCE prices were rising as quickly as expected, boosting hopes that interest rate cuts will come eventually this year. There is a lack of major US economic data this week until unemployment on Friday, though we will see plenty of Federal Reserve members speaking this week.
Eight of the eleven sector groups of the SP500 closed higher on Friday, with Technology the strongest performer, followed by Energy stocks. Utilities stocks again saw the most selling.
The SP500 broke above the milestone high of 5,100 on Friday. With the index clearing this level for the first time, further gains look likely. Overall the momentum remains to the upside and the index remains on an uptrend, but prices do look heavily overbought after rallying for four months straight.
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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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