Globally traders have been buffeted by roaring bears and rampaging bulls. Profit-takers stepped in after a record breaking October performance in which the Dow Jones was up over 12% for October and the S&P500 surged 17% for October, while in Europe the Stoxx Europe 600 index jumped 10% for October, while in the month in London the FTSE 100 gained 8.1%, while the German DAX 30 rallied 12% and the French CAC-40 gained 8.8%. In Australia the ASX 200 jumped 7.5% for the month.
Traders decided to take profits off the table earlier in the week, after the staggering surge higher last week, as the EU leaders clarified their “comprehensive” plans to address the eurozone debt crisis. Volatility initially eased, but pushed higher as the week progressed, as the eurozone debt plan implementation issues surfaced.
There was a sharp sell-off triggered by the Greek PM after he said he would force a referendum over the proposed EU bailout plan. However the G-20 summit leaders made it clear to Greece that they must accept the austerity measures in order to quality for any further bailout funds. The Greek cabinet has since backed down from calling for a referendum.
Central banks globally have been accommodating with the US Fed leaving rates on hold, the ECB surprisingly cutting interest rates to 1.25% overnight and in Australia the RBA cut interest rates by 25 basis points to 4.25% this week. There are still concerns over financials stocks particularly those with exposure to European debt, after the world’s biggest futures and derivatives broker filed for bankruptcy this week.
The markets appear to want to push higher, as many of the global markets are finding support around their 50 day moving averages, having pulled back earlier in the week. The November-December period is typically good for stocks, so if the eurozone debt situation can settle, then we should see some Christmas cheer. However if this week is a sign of the times, then the implementation issues surrounding the EU bailout plans could provide added volatility during this period.
The US dollar has been undergoing some huge volatility of late and this has been affecting commodities prices. The major metals have held on to recent gains with gold up at $US1,766 per ounce, Crude oil at $US95 per barrel and copper at $3.58 per pound.
Our View For Australia
As we suggested last week the S&P/ASX 200 found resistance at its 200 day moving average and it sold down all the way down to its 50 day moving average which is currently acting as support. In the Analyst’s Eye we talk about how the “bull trap” trade setup .
Aussie traders have been held hostage to what is happening in Europe, particularly in Greece. However the markets really look like they want to push on higher in to the end of the year. The RBA has cuts interest rates for the first time since April 2009, reducing rates by 25 basis points to 4.25% this week, as we anticipated. Retail sales grew for the third straight month in September up 0.4 percent, following a rise of 0.6 percent in August and providing a sign of optimism for the domestic economy. This should help retailers as we move into the Christmas shopping period.
The banks have completed their annual reporting with ANZ Bank has increasing its full-year profit by 19 percent to $5.36 billion. Westpac reported earlier in the week saying that its full-year cash earnings over $6.3 billion, while last week NAB said its cash profit came in at $5.5 billion. The Commonwealth Bank, which reports its results to the end of June, said in August that its cash profit totaled $6.8 billion. In sum, the cash profits totaled about $24.3 billion. Improving commodity prices will also help our miners.
After another struggle between the bulls and the bears this week the bulls appear to be retaining control, though they need to push the markets through, and hold above the 200 day moving average in order to confirm their dominance. The Aussie market has found support around its 50 day moving average, which sits around 4150, and must breach the resistance around its 200 day moving average, which sits around 4,410 in order to confirm its positive momentum.
Investors should be looking to utilise options strategies to protect their profits in this type of market. Investors have given their vote of approval on the eurozone bank rescue package and the proposals for the extension of the EFSF bailout package, it is a matter of overcoming the implementation issues going forward.
Remain attuned to the news from overseas particularly from China, Germany and the US regarding their economic growth and debt issues. Monitor the performance of the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 is currently trading at 4275 having found support again around the 4150 level this week. Key levels for the index next week will be 4150 and 4410, with 4300 the key pivot level. Be prepared to use options to protect your profits and reduce your risk. Expect to see volatility to remain elevated as the market participants look for some confirmation of the near-term market breakout.
Use options strategies to reduce your risk in these volatile times. The MDS Financial Advisory Services team can help with this and we have also discussed some of the strategies in our Analyst’s Eye Articles recently. Call me on 1300 610 024 for further information.
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By Michael Hevern
MDS Trading Desk