It’s decision time for traders as markets test key levels around the globe. The US continues to outperform, but the ASX has also shown some strength this week. Traders cheered the news that the IMF raised its outlook for global economic growth to 3.5% for the year, though the news was tempered by the IMF also urging stronger measures to deal with the eurozone debt crisis.
In the US the earnings season has begun on a positive note. The banks are holding on to recent gains, while we are seeing some profit-taking in the tech sector and this money appears to be rotating into the downtrodden resource sector (which would be good news for Australia). Broadly the market indexes are hanging on to their 50 day moving averages, but if these levels fail to hold we could see markets retest their 200 day moving averages some 7% below where we are today, which would be a healthy correction.
Traders are having to balance the good US earnings reporting season and the troubles with eurozone debt issues in the PIIGS economies. Domestic US economic news has been mixed this week, but overnight there was positive news with the index of leading economic indicators posting a sixth straight increase in March, while the Federal Reserve said banks will have two years to bring their activities in line with the “Volcker rule” before regulators start enforcing it, which is expected to be seen positively by the banks and investors alike.
Key European markets are retracing from their 50 day moving averages and look to be on track to test their 200 day moving averages near-term. European financiers have been visiting the US this week to argue their case that the eurozone financial system needs even more funding than the recent EUR1 trillion LTRO. Financial-sector stocks have led the markets lower in the eurozone, as the costs of borrowing for Spanish, Italian and French debt have been edging higher, while resource stocks have been generally weaker. The eurozone markets are due for a bit of a bounce, having closed lower in the past four weeks, and the comments from the International Monetary Fund as it raised its forecast for global economic growth in 2012 and 2013, citing improved financial conditions and unwinding of the financial crisis, have seen bargain hunters step in late this week. The global investor mood is very much dependent on the resolution of the Spanish and Italian debt issues near-term.
In Asia key markets are holding at or above their 50 day moving averages, with the Hong Kong market outperforming. The Chinese market has bounced strongly in recent weeks, as traders anticipate that the Chinese government will lean towards monetary easing in the near term. The main news of the week revolved around Chinese economic growth GDP, which slowed to 8.1% in the first quarter from the year-earlier period (below the 8.4% expected). Also traders are taking time to digest the ramifications of the announcement by the People’s Bank of China to double the yuan’s trading range against the dollar on a given day from 0.5% to 1%, pushing currencies such as the yen and the dollar higher, and hurting commodity prices.
In Australia the market continues to drift higher. A number of major resource companies have reported quarterly production figures which have been impacted by weather conditions, but companies are generally holding to their full year production forecasts, which should be a positive for the overall market and could be just the ticket for our market to push through the key resistance levels that have kept our markets in check since the melt-down back in August last year.
Commodity prices have been trading sideways this week, as the US dollar has eased. Crude-oil prices are hovering around the $US102 support level and copper has again been unable to trade above $US4.00 and is holding below its 200 moving average support around $US3.60, while gold prices have again found support around $US1,640.
The Aussie market has again bounced off its 200 day moving average, and is testing its 9-month resistance level, around 4380 level again. On the S&P/ASX 200 the 4250 level remains the crucial support level and 4400 is the key level on the upside. Stocks have effectively been drifting higher as we move into the bank reporting and dividend season, but we need the materials sector to participate for the market to reach new highs.
A number of the S&P ASX sectors are performing strongly above their 150 day moving averages, having broken through key levels in early March. These include the defensive sectors of Healthcare and Property Trusts, while Telecoms and Utilities have eased. The Financials, Consumer Discretionary, Consumer Staples, Industrials and Energy sectors continue to bounce higher off their 150 day moving averages, while the Materials sector looks to be finding support at current levels, but it continues to underperform.
Traders should be looking to protect their profits in this market and reduce their risk by using options and warrants strategies. The D2MX Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Investors should also be looking to utilise options and warrant strategies to protect their positions and profits. Options are a relatively cheap form of insurance, as volatility remains low, and you can also leverage yourself for breakout trades as they occur.
Remain attuned to the news from overseas, particularly from the eurozone and China in relation to easing policies, and the US as their markets back off their multi-year highs. Monitor the performance of China and the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 index is currently trading at 4359 and is holding above the key 200 day moving average. Key levels for the index next week will be 4250 and 4420, with 4300 the key short term pivot level.
By Michael Hevern
DMX Retail Trading Desk
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This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.