Traders began the week exhibiting caution, but as the week progressed the great market melt-up continued. Investors chose “risk-on”, and we saw continued switching out of the defensive sectors which have had a spectacular run, into the growth-sensitive mining and energy sectors. We now have the European market on track for eleven consecutive weeks of gains and the US on track for five consecutive weeks of gains, but unfortunately the Asian market continues to lag.
US stock markets continued to melt-up this week and are approaching multi-year highs. The S&P 500 index has broken out of its narrow trading range overnight (it had been trading around 1400 for the past seven sessions), while trading ranges on the Dow Jones have also been at their narrowest since last March. The S&P 500 index is on track to post its sixth straight week of gains and is within sight of hitting multi-year highs, while the Dow Jones index is approaching 5-year highs. The three benchmark indexes have all risen around 1% for the week, as the growth-sensitive sectors lead the way higher with the materials, energy and technology sectors up 1.6%, while the financials and industrials sectors were up by more than 0.7% overnight. However trading volumes remain at low levels not seen since 2008, as investors sit on the sidelines awaiting action from the central banks. Notably the cost of options to protect against further declines in the S&P 500 have fallen to a five-year low with the VIX around 13.7, in a sign that investors are comfortable with the current market conditions.
European stock markets traded higher to close at their highest levels since March, as the Stoxx Europe 600 Index is now up 16% from its June lows. European stock markets have rallied for the last 10 weeks as investors anticipate a coordinated action by central banks to address the eurozone crisis in the hope of stimulating the global economy. Traders have cheered the news that Spain is about to get an emergency disbursement from a EUR100 billion-euro bailout package, as German Chancellor Merkel said even though the European Central Bank insists on strict conditions placed on bank borrowing in return for help to lower borrowing costs in debt laden countries, Germany is also committed to ending the debt crisis in the eurozone. Across the region the miners, energy and financials sectors rose, but telecoms dropped after some recent downgrades in the sector. The three benchmark indexes are trading in a tight range at the moment and refuse to go down on good or bad news.
Asian stock markets have drifted lower in the past week, due to ongoing concerns over slowing global growth. However we are seeing some buying as the week comes to an end. The MSCI Asia Pacific Index is trading flat for the week and is down -6.7% below its February high. Of the three benchmark indexes the Japanese market outperformed jumping nearly 4% for the week, while in Hong Kong and China the markets have declined around -1.5%. These declines came despite Chinese Premier Wen Jiabao reiterating that the Chinese government is trying to support growth, and this is why investors are expecting further easing measures in the second half of this year. However recent comments from the Chinese central bank revealing that it is still concerned about a rebound in inflation have weighed on sentiment. To-date the Chinese central bank has left the reserve ratio for the biggest banks at 20 percent since mid-May and has lowered interest rates in June and July. Investors are showing concern that the central bank may hold off on further easing measures in the near-term.
In commodities crude-oil prices again surged to around $US96 this past week, as traders positioned themselves for the anticipated stimulus of monetary easing globally. The gold price has bounced in the past few of sessions to $US1,620, after news of the ECB’s reassurances and the prospect of QE3 in the US, although this will be delayed into September at this stage. Copper prices have settled to their 1-month support levels.
The Australian market has continued higher and is now at 3-month highs, due to the prospect of coordinated global central banks action, and our mining and energy stocks continue to show much needed signs of recovery. The 4300 level is the current pivotal level and 4260 is the critical support level for next week.
In our market the defensive sectors have seen further profit taking, with traders moving towards growth-sensitive mining and energy stocks as our earnings season unfolds. Companies that disappoint are being punished through their share prices, with Telstra, Real Estate REITs and health-care stocks all easing this week, despite the dividend season this month. The industrials, materials and energy sectors are bouncing off key 3-year lows, and we have seen some active short covering in the near-term. The financial sector is at 12-month highs. In the past few of weeks we have forwarned that we are seeing some buying in the energy and materials sectors as investors are seeking some ‘Risk-On’, and we have seen follow-through again this week.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. Look to pick up value stocks in growth-sensitive sectors, when they reach your buy levels.
Remain attuned to the news from overseas, particularly from the eurozone, China and the US, and as companies continue their reporting. Monitor the performance of Italian and Spanish borrowing costs, 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 4351 and is looking to close the week at its highs for the week. Key levels for the index next week will be 4260 and 4400, with 4300 the key short term pivot level.
Contact me at D2MX Trading on 1300 610 024 and I can help you trade, using a number of strategies that will give you the tools to navigate this market and help you boost your returns on investment.
Investment Adviser D2MX Trading
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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