The XJO is expected to start the week in the red, with an expected open near 8,250, or about 50 points lower than where we finished last week.
We finished last week holding key support at roughly 8,300, which is both a key level of support and roughly where the 50 day MA comes in. Indeed, we managed to retake intraday gains to finish exactly on the 50 day MA – a point of comfort for our market. By hanging around the 50 day MA, our market is neither overbought nor oversold by that short-term metric, as the index is trading at the average price it has been bought or sold for over the past 50 sessions.
The U.S was flat on Friday night, and their futures are only marginally in the red. Our weakness could be due to you stronger than expected employment reading on Thursday last week. Our economy has been at full employment, with our unemployment rate hanging at 4.1% for much of this year. However, on Thursday our reading came in at 3.9% for November. Our economy is now at fuller employment, which is inherently inflationary. This has likely spooked anyone that was perhaps naïve enough to believe rate cuts were coming early next year and the market clearly doesn’t like it.
Aside from this, it may also simply be that our market is trading at the most expensive we have ever seen. By almost every metric, this is the most expensive market it its history, and by all rights should be trading much lower. For example, our companies on average are expected to pay less dividends and earn less profits than 2022, yet our index is trading at least 1000 points above where it was in 2022. Our pullback could simply be some rationality coming in.
Finally, our market may be unsure that the U.S can continue higher from here. If they do, we have now formed a good base in which to follow and rally. By immediate term indicators like the stochastic, our market is oversold, but even by the less immediate term indicators like the 50 day MA, our market is trading at reasonable levels. There is a tentative underlying uptrend line which has been in play since the start of August. If the market rebounds from here, it will likely confirm it.
Iron Ore has managed to trend higher and hold its gains. Our miners are not only undervalued compared to the broader XJO, but have lagged behind the rally in iron ore by a decent measure. We see opportunities in this space, but the broader XJO will likely need to be at least not falling to see those opportunities come good.
In essence, though our market has much to be worried about, with plenty of reasons to justify the selldown, we will still likely follow the U.S. The U.S is tracking sideward, but short, medium, and longer-term trends remain bullish, so we must assume they will continue so. Our market has pulled back to reasonable levels in which to rally from should the U.S continue higher, but otherwise, if the year is to finish in tears, then roughly 8,100 and 8,000 are our strongest targets.
In the week ahead its big news for the U.S, with retails sales, GDP, and a Fed interest rate decision where they are expected to cut again by 25 basis points. This could easily bring volatility to their market, and by extension, continue it in ours.
US Markets
US shares closed lower on Friday, with each of the three major indices finishing in the red. US shares closed lower despite the market expecting a rate cut from the Federal Reserve when they meet on Wednesday this week, perhaps because the pace of rate cuts is expected to slow after that point. US shares are incredibly expensive up here, and they remain near all-time highs. This week will also be a massive one for US economic data, with Retail Sales on Tuesday night Australian time, the Fed meeting on Wednesday night, GDP on Thursday night and PCE price data (inflation) on Friday night. All of this data and the Fed meeting have the potential to push the market either way – should it lift the market, we would expect slow and modest gains, should the market fall, selling could be pronounced.
Four of the eleven sectors of the SP500 closed higher on Friday, with Technology the strongest performer, though the gains in that space were relatively underwhelming. Most other sectors closed lower, with Communications, Materials, and Energy stocks the worst performers.
Techically, the SP500 is holding below the resistance at 6,100, and is showing bearish candlesticks. It is likely we could see the index move back towards 6,000, but overall the index is in an uptrend and we would expect higher peaks and troughs for now.
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