The XJO is expected to open higher this morning following an indecisive but bullish night in the U.S on Friday. Their futures are flat.
Our market was squeezing the point of a pennant, and like a spring, we have rocketed higher. We are finally playing catch up to the U.S, so for Friday and today it seems we are running our own race as the U.S consolidates sidewards.
In recent history, our market has pulled back almost immediately, or within a handful of consolidative days when making a fresh high. This morning’s expected open breaks that mould. We should open just above 8,000, though by the time the market opens our futures can change from time of writing.
This is blue sky territory for us. There is no next key level of resistance to target. However, our market tends to stick to whole numbers, so 8,000, 8,025, or 8,050 seems likely. The previous all-time high at roughly 7,900 is now our next key level of support. If we do see a pullback, that is our first target.
Stepping back and looking at the situation more broadly, our market for the past few months has been reluctant to rally alongside a strong U.S. Indeed, it felt like we were simply being held in place by their bullishness, and if we had seen weakness from overseas, our market would have had no trouble selling down. Our miners have lamented during that period, and our banks are very expensive at these levels. Furthermore, the U.S has good cause to rally, where our market does not.
The U.S is banking on both rate cuts this year, and a “soft landing” – and their data so far looks like they will get both. Their key macroeconomic data is coming in soft, or even slightly softer than expected. These readings have largely been in a goldilocks range where it shows the economy is cooling fast enough to warrant potentially two rate cuts this year, but not fast enough that it will cause an aggressive recession – thus increasing the likelihood of achieving the coveted soft landing. Their market continues to run on the back of these beliefs, largely driven by tech, which is overrepresented in their market.
But. When we look at our situation it is quite different. Our key macroeconomic data is cooling in the wrong places. Inflation remains sticky, and we continue to be at full employment. However, our retail sales remain very low and stagnant, and our GDP shows almost no growth. The RBA has threatened to raise interest rates in the last few interest rate decisions, expressing concerns around sticky inflation. So, whilst the U.S is getting what it wants, our situation is starkly different. Finally, our banks are very expensive at these levels and arguably overvalued, and they represent a large portion of our largest sector.
Even though the bulls are in charge, the bears could easily be planning a counter offensive. The U.S market is due for some mean reversion (perhaps even a correction?). Our market has joined the party, but it doesn’t feel like we belong here and that perhaps we were sent the invite by accident. Our banks are certainly due for a pullback (if not a correction!), and our materials are shaky with sidewards iron ore prices.
It could end in tears, but of course, when trading, we simply trade what we see. However, be cautious when buying the market at these levels as it looks due for some profit taking.
Markets will continue to be driven by key macroeconomic data. In the week ahead: we have Chinese GDP at noon today; Powell speaking tonight; U.S retail sales Tuesday night; local employment numbers on Thursday.
US Markets
US shares closed higher again on Friday, with the SP500 recording another all-time high, though it pulled back to close below the all-time high closing level. Shares continued higher with optimism around the potential for rate cuts this year, as well as with the economy still holding relatively strong and seemingly achieving a soft landing. However, gains were tempered by the start of the reporting season, with JPMorgan, Wells Fargo, and Citigroup all closing lower after reporting their earnings results. Over the weekend there was also an assassination attempt on Donald Trump, and this could impact US markets tonight. The earnings season will also continue tonight with other large banks and financial companies reporting results. While markets have been extremely bullish, earnings will need to be strong to justify the extremely high current share prices. It will be a pretty busy week for US markets, with plenty of earnings results, as well as economic reports. The next major economic data will be tomorrow night’s retail sales report, and there will also bee another speech by Fed Chair Jerome Powell tonight.
Ten of the eleven sector groups of the SP500 closed higher on Friday, with Discretionary stocks the strongest performers, followed by Materials and Technology stocks. Communications stocks were the only ones to close lower on average. Most other sectors saw moderate buying.
Technically, despite closing higher again on Friday the SP500 held below potential resistance at 5,650 index points. For further gains to be seen, the index will need to close above 5,650 index points. Should the index fall from here, the previous resistance at 5,500 is likely to act as support.
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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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