US markets were trading strongly in the green this morning but turned red in the last few hours of trade. The futures markets have also sold further into the red after Netflix reported after hours. Netflix beat on earnings estimates and revenue but missed on subscriber growth which has investors worried about what’s to come this year. Netflix is down 18.5% in aftermarket trading.
All sectors closed in the red but selling in Tech, Discretionary and Communication services led to the pullback. Financials were only down slightly, but Materials and Industrial stocks pulled back over 1%. The Nasdaq has now fallen more than 12% from its all-time high and has closed at its lowest level for 6 months. The index is at a key level which will technically determine if it will go into a bear market or hold the all-time high resistance from back in May last year. The SP500 broke a key level of support at 4,500 which is fulfilling a head and shoulders pattern. This pattern indicates that the trend is reversing putting a target to the downside around 4,200. But with most of the selling coming from the Nasdaq stocks I would wait for the breakdown on that index before taking too much notice of the SP500.
US 10-year bond yields have now pushed past pre-Covid levels but have now steadied off a bit here. Bond investors have been pricing in their view that easy FED money is coming to an end and rates are likely to go up. If they continue to climb, we will likely see further selling on the Tech space. With Netflix now disappointing the market, this space will remain on edge until something changes sentiment. The Fed meets next week, and we will start to see more big growth stock names reports as well.
There are several reasons we are seeing volatility in markets, but most of these things are likely only temporary issues. The FEDs rate worries are at the top of the list, with many people starting to believe that we will see 4 rate hikes this year. That many hikes will likely not be the reality which means markets will rebound once the mood changes. Worldwide cases of Omicron continue to rise which is also causing further supply chain pain and staffing issues. China’s growth is slowing amid Covid and issues in their real estate market, but they are looking to ease monetary policy which could help things out this year.
Australian Outlook
The XJO is expected to open lower this morning, following a swathe of late selling in the U.S last night. It’s been a tough week for the poor old XJO. It feels like our market wants to keep its head above water but continues to be dragged under by the U.S.
Tech is being blamed for the falls but selling was pervasive across all sectors. For example, materials fell despite strong gains in base metals. Considering our market isn’t tech heavy, we may remain resilient. In addition, U.S futures are somewhat flat and their bond yields came off last night.
We are expected to open near 7,250 which is an interim support on the way down to 7200 – the bottom of our market and the bottom of the channel. 7200 is the last line of defense for our market and hasn’t really been breached since crossing over it back in June last year. It looks like a very real possibility that we could go on test it either today or in the coming sessions. Our short-term stochastic point to a very oversold market, but for us to hold ground we will need to see the U.S cease selling. On a positive note, we don’t typically rise as hard as they do, but it also often means we don’t sell as hard either. The weekend should also hopefully act as a natural circuit breaker and let markets digest the recent selling. Finally, don’t underestimate the buy-the-dip mentality that has been underpinning markets recently.
US Markets
US shares closed lower again overnight, with prices trading higher up until the close, at which point they plummeted lower. Technology stocks were again the weakest performers and Netflix tanked around 19% after the market closed following disappointing subscriber numbers. Overall the narrative around rising interest rates is being blamed for the sell-off. We will get a bit more clarity on this next Wednesday with the Federal Reserve meeting for January. The US earnings season also continued overnight, with many better than expected earnings results. However, this wasn’t always enough to generate share price gains for the reporting companies. Netflix, for example, actually exceeded its earnings expectations. Economic data was mixed overnight, with jobless claims and home sales worse than expected, while the Philly Fed manufacturing index came in better than expected. We also saw US oil inventories start to build-up, which is a bit negative for oil prices. Utilities was the only sector to closed higher on average overnight, and even then the gains were very small. Every other sector closed lower, with Discretionary, Materials, and Technology stocks faring the worst.
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Tim Michaelides is the Head Trader at Emerald Financial Group.
Latest posts by Tim Michaelides (see all)
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