The XJO is expected to edge higher on open this morning following a flat night in the U.S. SP500 futures are flat this morning, but the Dow is firmly in the red.
We closed firmly in the red yesterday, unexpectedly so considering the U.S was flat the previous night. We smashed through the consolidation range, breaking key support at roughly 8,250 and descending to the next key support at 8,200. We finished about 130 points lower in the end.
Why now? We have been saying for a while that we would sort of wake up to hard day of selling soon. These days come with out warning as often as otherwise. It is not as if there is no reason for the selling, it is more so that we have ignored these reasons in our strive to follow the U.S – almost frustratingly so.
Our banks are still very expensive, with CBA having held the title of most expensive bank in the developed world for a moment there. The banks reached their all-time high resistance, and rebounded from them yesterday, pulling out largest sector, the financials, lower with them.
Indeed, the broader market is facing an earnings issue, with negative earnings this year and a bleak outlook for next year. This is the most expensive our market has been by most mathematical calculations. Most would agree that our market is overvalued considering our meek economic situation and monetary policy.
However, it still doesn’t explain why our market decided to sell out of the blue and the answer isn’t clear. Bond yields have driven higher over the past couple of days, which perhaps coupled with reaching an all-time high was a good sell signal for investors and an opportunity for shorters to jump in.
Sam covers this well in his weekly market update video posted last night.
Going forward, we should not assume that yesterday’s selldown is the beginning of bear market or extended pullback. Indeed, this morning we should retake some lost ground.
We continue to remain cautiously bullish to sideward. If the U.S can continue to hold ground if not move higher, our market will likely follow, and can do so easier now that it is at a lower base. 8,200 is key support, but the next major target is 8,100 which is also where the 50 day MA comes in. Despite our pause today, don’t be surprised if we do see these levels especially if the U.S has their own pullback.
US Market
US shares closed mostly slightly lower overnight, with the DOW JONES and the SP500 finishing in the red, while the NASDAQ was slightly in the green. Investors seem to be a little spooked recently with the rise in bond yields, which could be down to reduced expectations of rate cuts moving forwards. Earnings overnight were also a bit weaker than they have been, which perhaps added to the dour mood. Regardless, US shares are pretty much still at all-time highs and some profit taking here would be healthy.
Five of the eleven sector groups of the SP500 closed higher overnight, with Staples the only sector to see strong buying. Most other sectors were faily flat, except for Industrials, which saw strong selling.
Technically, the SP500 set fresh all-time highs last week indicating further upwards movement, though its hard to say where that movement may rise to though it did struggle to push through 5,870, which may now be acting as resistance to the upside. Should the index fall from here, the previous all-time high at 5,770 is now likely to act as support to the downside, though there is also a potential trend line which intersects at around 5,800, that the index may have bounced off overnight.
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