Investor nerves have been tested this week as volatility increased. Traders in the northern hemisphere are gearing up for summer and global growth is declining for a third straight year.
The bears remain in control of the markets, although stocks did tick up on hopes that the central banks will make a move towards quantitative easing. These expectations are proving to be premature, as the ECB and EU leaders are not likely make a move until after a government is formed by the Greek elections on 17 June. In the US the Federal Reserve Chairman Ben Bernanke stopped short of signaling new stimulus measures in testimony before Congress.
US markets are again testing their 200-day moving averages, which may end up acting as resistance near-term. Economic data continues to point to slowing economic growth and the monthly jobs data showed unemployment remains stubbornly high at 8.1%.
In the eurozone the Greek and Spanish markets were pummeled on debt contagion concerns, and even the German market sank lower, due to worry about growth in the region. The UK market had a shortened trading week.
Stocks did spike as investors were optimistic that the European Stability Mechanism could inject capital directly into eurozone banks, which would have the advantage of not loading the country debt levels. The ECB left interest rates at 1%, but said growth remains weak and the economic outlook in the eurozone is subject to increased downside risks, leaving the door open for a rate cut in July.
Asian markets are testing multi-year lows and at this time are bouncing, helped by news overnight that the Chinese central bank said it would lower benchmark interest rates on loans and deposits by 25 basis points.
There was a flight to safety, but the US dollar backed off the high levels not seen since mid-2010, which is putting pressure on commodities which are priced in US dollars. Crude-oil is at 6-month lows, copper is at 4-month lows, gold had a reprieve but is again heading to 10-month lows again, while silver is hovering around 15-month lows. This is putting pressure on the mining stocks across the globe, even despite the news overnight of an interest rate cut in China.
The Australian market has been volatile this week, and is trying to hold around the key 4080 level. Sentiment has been mixed, driven by news from the eurozone and hopes of central bank easing. Major market sectors have been tentatively holding on to the support levels of last week.
In our market the defensive sectors continue to outperform, with Telstra, real estate REITs and health-care stocks holding ground, as investors seek out stocks that can deliver consistent yield in this low rate environment. The materials sector continues to underperform on the back of lower commodity prices, but banks found some support as investors turn to dividend yield.
The Aussie market has been trying to find some support again this week, at a level established back in November around 4080. On the S&P/ASX 200 the 4150 level will now be a crucial resistance level and 4080 is again a pivotal level for next week. We have not seen capitulation by the bulls as yet, which could come about if the current weekly support levels are breached, in which case we could see the 3950 and then the 3850 levels tested.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. With the sustained selling we have endured over the past few weeks we are looking to pick up value stocks that pay consistently high dividend yields, when they reach our buy levels.
In this week’s Analyst’s Eye we discuss a Trading Plan For June, and the D2MX Financial Advisory team can help you trade the themes discussed in this article. Call me on 1300 610 024 for further information. Options remain an excellent form of insurance and are an excellent instrument for speculation.
Remain attuned to the news from overseas, particularly from the eurozone, now that China cut interest rates in its move towards policy easing, and the US, as the US markets trade around their 200-day moving averages. Monitor the performance of Greece, Spain, 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 4061 and is testing breakeven levels for the year. Key levels for the index next week will be 3950 and 4180, with 4080 the key short term pivot level.
By Michael Hevern
DMX 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.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.