The XJO is expected to reverse most of Friday’s losses on open this morning, following a small rebound in the U.S on Friday night. U.S futures are flat.
We seem to be following the U.S still, though with larger swings and what feels like a heavier dose of volatility. For example, on Friday, despite the U.S being flat the night before, our market sold off almost 1% – which we are now set to reverse this morning. On Thursday, we moved firmly and convincingly into fresh all-time highs, with only the U.S having a marginal rebound the night before.
Our volatility is likely due to a few factors. Firstly, iron ore is a remarkably volatile space as well at the moment. On Friday for example, it fell almost 2%, which caused our second largest index, the materials, to follow suit. Another factor is that for our market to continue following the U.S and hold our highs, our largest sector, the financials, needs to offset losses in the materials. As such, we have seen the banks practically return to their all-time highs and stretched valuations. Indeed, the XFJ stalled at their all-time high resistance on Friday.
It seems the run the materials, spurred by hopes of Chinese stimulus, is happy to have concluded for the moment. The XMJ is trading back at the 200 day MA and seems comfortable here for the moment. It is also trading above both the 50 and 100 day MA like the rest of the market, so it may not feel the need to do anything without further fundamental triggers.
Finally, last week we had strong jobs data, which only caused our Thursday move to give up some of the intraday gains. We are clearly still largely happy to shake off any reminders of our local predicament – a midframe that we likely inherited from the U.S. Indeed, markets seem to be following their own broken logic. For example, locally, our economy remains at full employment, and our inflation remains unnervingly high. Yet our GDP and consumer spending is terrible. We are already likely in per capita recession. Furthermore, it seems we should be alarmed that everyone is working longer hours, spending less and earning less, but paying more for goods. Our market remains unconcerned about this stagflation. One of the key benefits of full employment is that the bargaining power should be in the hands of the employed to negotiate higher wages, which would typically be a concern for inflation, but in reality, we aren’t seeing that wage growth. How long this mismatch in prices verse the broader economy will last is hard to say. But make no mistake, it could easily last for the rest of the year and there is little point fighting it.
As traders, we should continue to expect a slow gradual rise, because ultimately that is what we are seeing. We are still making higher peaks and troughs, albeit gradually, and the uptrend line is still in play. We remain a healthy distance above the 50 and 100 day MAs, and the slow grind seems sustainable at the moment. We are about 7% above the 200 day MA, which is getting towards the limit of where we would expect a pullback, however this is just on metric.
Key resistance remains at roughly 8,350 to 8,375 and represents our all-time highs. We may test it today, or this week. 8,300 to 8,250 remains key support, which is also roughly where the uptrend line comes in. We should expect roughly these levels to hold.
US Markets
US shares closed higher on Friday, with each of the three major indices seeing modest buying. The tech-heavy NASDAQ was the best performer, with strong technology and communications stocks helping the performance there. US shares rose with little fresh economic data, other than some slightly disappointing construction data. Company earnings reporting did continue on Friday, with some disappointing reports from Proctor and Gable and American Express. Regardless, US markets are extremely strong at the moment and are convinced that a recession is not coming anytime soon, however, they are also concerned that the data is too strong to allow too many interest rate cuts from here; as a result, weaker economic data could trigger buying while strong data (as we saw with US retail sales last week) could trigger selling. This is a pretty light week for data, but the earnings reporting will continue tomorrow night. Without much pencilled in this week, its hard to imagine anything other than a continued grind higher.
Ten of the eleven sector groups of the SP500 closed higher on Friday, with Communications the best performers, followed by Real Estate and Utilities stocks. Energy was the only sector to close lower on average.
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.
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