Weekly Market Wrap
The “buy-on-the-dip” traders in the Aussie market have been hurt this week. Traders have been selling on the back of improving global economic data, which is raising concerns that the central banks may be looking to change their easing bias into the new year. US and European markets have backed off their recent highs, which had been fuelled by central support for “easy” money. The Australian market has plunged lower this week and is again looking to finish near the lows for the week.
The US markets have pulled back for a fifth straight session, as traders chose caution in light of improving economic figures and ahead of the monthly employment report due out tonight. The three benchmark indexes have given back recent gains, backing off record high levels. Volatility has jumped to six-week highs above 15, having risen over the past eight sessions. The S&P 500 and the Dow Jones have fallen around -1.5% in the past five sessions, recording their longest losing streak since September. The S&P 500 index is still up 25% for the year however, and is on track for its best annual performance since 1999, while the Nasdaq has held above 4000 for a second week.
Economic data continues to improve, raising concerns over Fed tapering ahead of the FOMC meeting on 17-18 December. The US economy expanded at a faster pace in the third quarter, with GDP jumping to an annualised 3.6% (up from 2.8%), its strongest reading since 1Q 2012, while inventories increased the most since 1998. Earlier in the week the ADP jobs data showed improvement, adding 215,000 jobs in November, while the Beige report showed US services industries expanded at a slower pace than forecast. Traders will be anxiously looking to the monthly NFP employment report due tonight, with forecasters looking for a drop in the unemployment rate to 7.2% and Non-Farm employment change of around 200,000. A recent global poll by Bloomberg has revealed 80% of investors expect that the US Fed will delay the taper until March 2014, but this NFP report will be pivotal.
European stock markets have also fallen for five straight sessions, backing off their highest level since May 2008. The Europe Stoxx 600 index has pulled back in the beginning of this month. The index is still up 12% for the year and is on track for its best annual gain since 2009, but the VStoxx index is rising up from its lowest levels since February 2007, as traders become cautious with equity valuations being at the highest levels since 2009. Overnight the ECB kept rates on hold at 0.25%, but ECB President Draghi said there are downside risks to the eurozone growth prospects going forward, citing weaker domestic demand, increasing commodity prices and slowing export growth. The German market is trading down by around -4% for the week, backing off all-time highs, with profit taking as valuations reached their highest levels since 2009, but the index is still up around 20% for the year. The London market is down -5% from its November peak and is trading at six-week lows, but overnight the BoE left their rates at a record low of 0.5% and government officials raised their forecast growth rate for 2013 to 1.4% (up from 0.6% redacted back in March) and now expect the UK economy to grow 1.8% in 2014.
Asian markets have been mixed this week, with strength in the Chinese and Hong Kong markets offset by profit taking in the Japanese market. The MSCI Pacific Index has weakened this week, but is still up around 9% for the year. The Chinese market is edging higher, trading up for a fourth week and is near three-month highs as traders digest the economic reforms resulting from the recent Plenary summit meeting. The National Bureau of Statistics has reported the Chinese official purchasing managers’ index (PMI) for the non-manufacturing sector eased slightly to 56.0 in November (down from 56.3 in October), which is a sign of stabilisation as the world’s second-largest economy pushes ahead with structural reforms. The Japanese market is seeing profit taking and recorded its largest two-day drop in four months, after having risen to its highest level since December 2007. The Hong Kong market eased again holding below the 24,000 level, backing off its highest level since April 2011.
In today’s article we look at the historical evidence behind the prospects for a Santas Claus Rally and provide some insight for what may be in store for the balance of the year, based on historical probabilities.
The Australian equities markets are currently down by nearly -3% this week, as the bears have made their presence felt over the markets in the past six trading sessions. The ASX 200 has pulled back around -6% since the late October peak and looks set to test the 5120 level October low near term. The indexes have plunged through the 50-day moving average level and now look set to test the 150-day moving average support near-term, which happens to coincide with the lows of last October, where the bulls staged their last rally (refer to today’s Analyst’s eye for more details). Last week we highlighted that the continued “weakness in the Aussie dollar, has prompted international fund managers to take profits [the banks] in the post dividend season”, well that selling accelerated this week. For those with a contrarian bent, this recent pullback is providing the “buy-on-the-dip” traders with the possibility for one more chance to chase this market higher into the Christmas period.
We have seen some sharp falls this week, led by the banks down -4%, as fund managers look to be banking their profits for the year, and the property sector is down -3.9% trading at its lows for the year. The Industrials sector is down -2.7% and the miners are down -1.7% for the week. The Energy sector has bucked the trend by finding support around its six-month lows and is finishing up 0.7% for the week.
The Aussie indexes are finishing the week close to their weekly low. The focus has turned towards the US employment and Fed tapering near-term, which has seen the Aussie dollar remain under pressure. Across the market the pullback has again been broad based, with strong selling in the Financials, Property and Insurance sectors.
Key levels for the ASX 200 index next week are around 5140 and 5260, with 5200 the key near term pivot level. Note volatility has picked up again this week , as the “buy on the dip” strategy has been hurt. Investors should be looking to take this opportunity to use options to position their portfolio(s) near-term with defined risk, and warrants can also be used to hedge existing positions – refer to our previous note on Hedging Your Position(s) Using MINIs.
The ASX 200 and All Ords have pulled back and are testing key support levels and if they hold then we could see a push up into December through to early January. Note the ASX seasonally runs higher into the end of the year and has a tendency to produce substantial gains in the final couple of weeks of December.
Remain attuned to the news from overseas, particularly from the eurozone (ECB/stimulus), China (reforms) and the US (Fed/employment). Monitor the US dollar for a guide to the future direction of commodities and equities prices.
Contact me at D2MX Advisory on 1300 610 024 and we can help you trade, using a number of strategies that will give you the tools to navigate this market and help you improve your returns on investment.
Investment Adviser D2MX Advisory
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.
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