The XJO is expected to open higher this morning following two consecutive sessions of gains in the U.S on both Thursday and Friday night. Their futures have dipped into the red.
Our expected open as of writing is roughly 8,050. Both key resistance and the 50 day MA come in at roughly 8,000. With this morning’s open, these levels should be cleared convincingly. In doing so, our market will have also cleared the recent major peak, bringing the downtrend’s validity into question.
By moving above the 50 day MA, our market will be marginally overbought in the short-term. In the immediate term however, the stochastic has our market about as overstretched as it can be, and we are pushing the top boundary of the Bollinger bands. This means that we should expect some mean reversion and normalising of these immediate indicators soon. The reversion could translate to some healthy profit taking or sidewards movement.
It is hard to believe how strong our market has rallied since our lows back at the start of the month. The “V” shaped recovery is extraordinary, all things considered. By moving above the downtrend’s previous major peak, our market cannot be said to be trending up or down, as there are no consecutive higher or lower peaks and troughs. This may mean our market is tracking sideward in a major range, but there is little evidence of that also at this stage.
With 8,000 breaking, the next key level is roughly 8,150. It is both a major historic level, and where the 200 and 100 day MAs have converged. If our market were to reach these levels, and you were to buy or sell this market, it would mean you are paying or selling the average price our market has traded at over the past 6 months, and 12 months. In essence, our market would be neither overbought, nor oversold in the medium or long term – quite an extraordinary feat.
We believe that part of our strength is likely coming down to a flight of capital away from the U.S. This is reflected in the strength in our dollar compared to theirs. Trump clearly spells an intrinsic risk to trade and the economy. His administration has suggested that China are begging for a trade deal. China has of course refuted any such claims. Media has returned focus back to the culture war though (immigration and due process), and focus on Trump’s tariff economy has largely been moved to the side for now. A welcome respite for markets.
However, it would be hard to suggest in any meaningful way that we are out of the woods. It would be as equally hard to suggest that Trump’s ego will not have him reignite trade tensions and tariff wars. Though, the real masters – capital markets, have made it clear that he can do whatever he wants, as long as he doesn’t mess with them. And perhaps he has listened.
Last week was a quiet news week for key macro-economic data. However, in the week ahead there is plenty to look forward to. Firstly, there is local CPI on Wednesday at 11:30am (AEST). CPI is expected to increase from last month in good measure but stay marginally lower than the same time last year. Wednesday night, the U.S has GDP data, which is expected to tank from last quarter. They also have PCE data that night. On Thursday night, the U.S ha PMI data, and on Friday we have local Retail Sales numbers and PPI data. On Friday night the U.S will have unemployment figures, and finally, we have our federal election this weekend – though we won’t react to it, if at all, until next week.
US Markets
US shares jumped on Thursday and Friday, with the SP500 trading at its highest level since late-March. Markets have been enthused by the prospect that Trump is backing down from his trade war, seemingly with nothing gained. Still, many tariffs remain in place and so far China has been unwilling to make a deal. This will likely make investors nervous again soon, as we are likely to see a strong economic downturn from the US even at current tariff settings. Markets will likely have further upside if Trump can secure a deal with China, otherwise a resumption of selling seems likely.
On Friday only five of the eleven sector groups of the SP500 closed higher, but that was enough to push the index higher. Discretionary, Technology, and Communications were the best performers. Materials and Financials fared the worst.
Technically, the SP500 closed higher for the fourth straight session on Friday leading to the index arguably breaking the downtrend line that has formed since February. This should indicate a move back to the peak of late March around 5,775, which is also where the 200-day moving average sits.
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