The S&P500 closed at an all-time high overnight as reporting continue to come in strong. If reporting continues to be strong, we will likely see a further push higher over the next week or so. In addition, we are starting to hear that the democrats will outline spending plans this week
The Nasdaq led the move higher with Facebook and Tesla reporting exciting investors. FB missed on revenue but beat on earnings. We will see many Tech and Discretionary stocks report this week, which could see the Nasdaq index play some catch-up and test all-time highs.
Inflation is still a worry with many investors starting to price in that interest rates could go up in the US next year. US Bond yields continue to climb, which means many expect rates to rise. The US 10-year is now back to 1.70%, which is high for the year. It will be interesting to see if it clears this level or not, furthermore, it will be interesting to watch how the market reacts. Locally the RBA continues to signal that interest rates won’t go up until at least 2024.
At this stage, the typical seasonal pattern is playing out perfectly here. We would expect the bullish momentum to continue through the US reporting, then a pullback at some point in November / early December. This then sets things up for a rally into Christmas. This year the US will need to deal with headwinds in Nov and Dec from the debt ceiling issues and the FED starting to taper. The FED will meet next in the first week of November.
Daily virus numbers worldwide continue to decline. Locally Australia has now surpassed the 70% second does target and will likely hit 80% within weeks. NSW is on its way to hitting 90% double dose targets with Vic set to hit 80% by the end of this week. This will end all lockdowns in Australia but with some states still yet to hit 70% targets the freedom of travel from within Australia is still perhaps a few months away. NSW and Vic are both looking to start accepting vaccinated overseas travellers back in without a 2-week quarantine period. This is all very positive as we are slowly reopening Australia, and we will see immigration back next year which has been one of the main drivers of our economy.
Australian Outlook
The XJO is expected to open higher following a strong move in the U.S last night. Their futures sit flat, and if they remain so during our session we should be able to hold these expected opening gains. Finally, with the U.S making fresh all-time highs after consolidating at resistance, our market may finally have the confidence to move away from 7,400 with some conviction.
Technically, the XJO has a strong resistance at virtually every 50 point increment. The next key resistance though is likely 7,500 -7,530. If we fail here, perhaps caused by a healthy retracement in the U.S, 7,400, the uptrend line, and the 50 and 100 day MAs should act as support.
For our market to play catch up with the U.S and make our own highs, we will need to see either the Financials (XFJ) and/or the Materials (XMJ) get on board with the rally. The XFJ broke the ascending triangle higher but has stalled and is tracking sideward. We may see further strength in the coming days as the three of the Big Four banks report towards the end of the month. Following their reports and/or dividend though, we may see some typical selling.
The XMJ on the other hand continues to look oversold. Iron Ore seems to be tracking sideward and looks like it has finished making new lows (for now). Aluminnium, nickel, and copper also made gains overnight following a recent pull back in their run up. Oil and gold continued their ascent as well. All these gains in base commodities should flow through the to XMJ. The XMJ looks like it has started to form a short-term uptrend, but to make a new high, will need to get through key resistance at roughly 15,500 – a level it recently failed at.
US Markets
US shares rose again overnight, with the SP500 and DOW JONES indices finishing at record highs. The SP500 index has also now enjoyed eight gains in its last nine sessions, with US investors showing they are optimistic about the future for American businesses. The strong earnings reporting season has been the major catalyst for the gains, with stronger than expected earnings results demonstrating that prices weren’t too expensive. Overnight we also saw comments from US Democrats that their spending plans would be outlined this week. Nine of the eleven sector groups of the SP500 pushed higher, with Discretionary the strongest sector, followed by Energy, and Materials. Utilities were the only stocks to close lower to a noticeable degree.
Tim Michaelides is the Head Trader at Emerald Financial Group.
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