Online Stockmarket Trading Update

Times up – the ASX is at a Crucial Juncture

Back on December 16th we talked about time and money working on the Aussie share market, and it is now time to evaluate how things played out, and what we may be in store for. We suggested in the article that volumes would be subdued into early 2010. Now volumes are picking up and volatility is on the rise.

In the article we identified that “the market will need around 120 days (from early October) to build enough momentum for its next move”. We have now traded around 110 days since the recent October peak and are entering into a crucial price and time inflection point due around the end of February. Coincidently March 2009 signalled the end of the rout on markets due to the global financial crisis.

We also concluded: “Traders who choose to invest in the markets over the next four to six weeks need to be nimble. Take profits when and as they arise and honour your stops. Only trade in liquid stocks, this may limit you to the ASX 50 or even the ASX 20 stocks between Christmas and New Year…Remember time is money, the longer you are exposed to the market the higher the risk of an adverse movement. Trade the market using a range trading methodology”.

The chart below confirms that the markets have in fact traded in a range between 4500 to 5000.

The 4500 level on the ASX200 has been the critical level which the markets must hold in order to build momentum for another move either up or down.

Locally the fundamentals of the Australian economy point towards a move higher for the markets. The RBA has put interest on hold, saying that they want to see the impact of the previous interest hikes flow through into the economy. The RBA sees inflation at the lower end of its target range from 2% to 3%, but the interest rate bias is still to the upside. The surprising fall in unemployment to 5.3% is supporting the view that the economy is bottoming.

We have highlighted the forces current impact in the world markets in our Market Wrap section. The reporting period in the US was good with over 70% of the S&P500 companies beating analysts’ estimates. However, the US equities markets have not reflected the good company reporting season, being driven more by the issues with potential sovereign debt defaults, with the EU’s PIGS economies (Portugal, Italy, Greece and Spain), and the China Central Bank increasing the capital requirements of the commercial banks, thereby putting the screws on the money flow within China.

Conclusion

The market, through the passage of time, is resolving its current sideways trading, late February will be key. There is still a huge amount of money on the sidelines, much of which has been withdrawn from equities over the past six weeks.

We are cautiously positive on the prospects of the market in the near term and the reporting period here in Australia has started on a positive note. Fund managers will need to start to deploy their funds in the near term.

There are a number of factors that would change our view including: if there are consecutive closes below 4500 with increasing volumes; or if there is a deterioration with the issues involving the PIGS economies or China’s pullback on money flow stall their economy.

Michael Hevern
Head of Research