The XJO is expected to open lower this morning following a small pullback in the U.S on Friday. Their futures are flat.
We have been getting ahead of ourselves, pricing in overseas gains pre-emptively but being largely vindicated in our moves thanks to the U.S also breaking higher. On Friday we tried extending the rally but gave up most of the intraday gains to finish only marginally in the green – the soul of our market is willing, even if the body is not at times. With a tired U.S pulling back on Friday (albeit marginally), our market is set to somewhat normalise and shed most of last Thursday’s break higher.
We should open near 8,150. This is a level we flirted with and ground along in much of our consolidation last week. We eventually broke through it on Thursday and set fresh highs near 8,200. This is the next key level of resistance and 8,150 is likely the next key level of support. We may break through 8,150 today, but with our unusually strong bullish undercurrent it seems we would likely need U.S futures to move a good measure into the red to do so. 8,100 is the next key level of support beyond 8,150 and roughly represents the bottom of the consolidation range of last week.
In the immediate term, our market remains quite overbought. We are grinding along the top of the short-term Bollinger bands and the short-term stochastic remain firmly in the overbought area. On Friday we moved outside the Bollinger bands, helping to explain why we shed some of our gains to withdraw back inside. In the less immediate term, but still shorter-term however, our market is in a reasonable position from a technical perspective. We are not unreasonably too far away from our key moving averages, and we have gone through periods of consolidation on our move up which helps strengthen the underlying uptrend. Furthermore, we broke the ascending triangle higher.
In essence, from a technical perspective, in the very short-term we should expect a pullback – which we will see this morning. But from a less immediate but still short-term perspective, continued gains are justifiable.
From a fundamental perspective however, our market remains extremely expensive – perhaps the most in our lifetime. It is reasonable to suggest that our market is only really rallying because the U.S is, and not because of our current macro or micro economic environment. Indeed, our macro and micro economic environment would suggest we should be trading much lower. This is exemplified in the banks, which have been championing the broader market rally and are at trading at very stretched valuations. For example, CBA has rallied 50 per cent over the past year or so. As a rough comparison, our market has rallied just over 20 per cent.
Some of their heavy lifting feels due to the other major sector, our materials, lamenting for much of this rally. They have fallen roughly 15 per cent from their highs at the start of the year thanks to strong falls in key commodities like Iron Ore. This would typically drag our market down, but thanks to the heavy lifting of the banks and the rest of the market, we have managed to break into fresh highs. The banks’ backs must be getting sore though.
The U.S cut interest rates last week. This sort of brought them closer to parity with our interest rate. Powell was cautious in his messaging going forward but the U.S market still loved it.
Markets will remain tied to macro-economic data releases. At this stage, our market doesn’t seem to care too much about our own situation which is quite different to the U.S – but that may change over time. Whilst the U.S is still harboring the belief of a soft landing and lower interest rates, our market is moving towards stagflation. Our GDP and retail sales remain marginal, but our inflation and employment remain sticky. Our RBA cannot follow the U.S cuts this year, but there is hope that our economy cools enough to follow next year in a reasonable time frame.
In the week ahead: tonight we have U.S PMI data. Tomorrow at 2:30pm (AEST) the RBA will have an interest rate decision. They will almost certainly keep rates on hold, but our market will be looking at the forward guidance as usual. The RBA for the last few announcements has practically copied and pasted their previous announcements. It typically consists of rhetoric around “nothing being off the table” and “we will continue to monitor” – all very non-committal. On Thursday night the U.S has GDP numbers which are expected to increase. It is hard to tell whether this is positive for their market or not. On the one hand it keeps the narrative of a soft landing. On the other hand, it means far less chance of another cut soon. To finish off the week the U.S has PCE data.
US Markets
US shares closed flat to slightly lower on Friday, with little change across the three major indices. Prices initially traded lower, but they rebounded in the last two hours of trade to finish only slightly lower on average. There was nothing in the way of news or events to shift the current upwards momentum, and there wont be a whole lot until Thursday night, when we will see US GDP data. This reading is a revision of second quarter GDP, so its uncertain over how relevant it will be. Finally, on Friday US PCE price data will be released, and that will be the most important report of the week. Any sign of inflation remerging here is likely to be met with selling, given how aggressively the Federal Reserve has started the cutting process.
Only three of the eleven sector groups of the SP500 closed higher on Friday, with only Utilities seeing notable gains. Most other sectors were flat to lower, with Industrials the worst performers.
Technically, the SP500 recently broke above the previous all-time high resistance at 5,675 and looks to be on a short-term uptrend line. On Friday, it fell back to test 5,675 as support. Should it close below that level, it would indicate further selling. Should it keep rising tonight, its hard to say where it may head to.
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