There's still room for caution in global equity markets
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It is important to look at the "big picture" and digest what is happening in all the markets, not just individual asset classes, technical analyst Lesley Beath says.
As this will be my last report for the year, I would have liked to present you with some pearls of wisdom, and some major insights as to what may happen over the next few weeks.
Unfortunately, there is not a lot to add to what we have been talking about for the past few weeks. Nothing has changed dramatically, and at this stage I can't see any strong signals that a major change is imminent.
Let's do a quick summary of what is going on and what some of the driving factors are.
The US equity market: The break of resistance on the Dow Transports, the Banks and the Russell 2000 is positive and bodes well for future performance. But in the short term, with the US T-Bond/S&P 500 ratio on support, there is potential for a near-term correction in the equity market.
That is by no means confirmed at this stage, but as I said in the last report, now is not the time to be complacent.
The US T-Bond is also now on support, after hitting the Fibonacci 61.8 per cent retracement of the 2014-2016 up leg. Lateral support associated with the mid-2015 lows is in close proximity.
Gold too is on support--the Fibonacci 61.8 per cent retracement of the up move from the late 2015 lows. And while gold and the equity market are not necessarily inversely correlated, they have been since Trump's victory.
With gold and T-Bonds on support, could there be a safe-haven play ahead? I could be overly worried but I think some caution is warranted.
European equity markets: As has been the case for some time now, the UK FTSE, the German DAX and the Paris CAC 40 remain below significant support. A topside break is not indicated.
The Australian equity market: As noted last week, the All Ords is still some way below key resistance but it does have minor resistance at current levels.
Resistance on the ASX 20 Leaders Index and the All Ords Accumulation index is significant and that resistance was tested last week. The major banks retreated from resistance last Friday.
If they come under pressure, I don't think the resources and other industrial stocks have the ability to propel the broader market significantly higher. Although the price charts of the major resource stocks remain constructive at this stage, they are beginning to lose upward momentum.
And I do worry that the iron ore price is still below its 2011 downtrend.
Copper broke above the major downtrend the week before last, but the three-month forward contract has not overcome the spike high of 11 November.
Does that really matter, given the break above the 2011 downtrend? Maybe not, but with aluminium and iron ore below that same trendline, a sceptical approach may be warranted.
Elsewhere, zinc and lead have surged in recent times. Last week's volatility may be a warning that something may be about to give.
On the currency front, I noted in the last report that the euro/US dollar was still holding above support, despite the fact the US Dollar Index had broken topside the previous week.
However, and this is where it starts to get a bit complicated--if gold and the euro are on support, the obvious thought is the US dollar might begin to soften. That makes sense.
But if that was the case you would assume a softening dollar (and there is evidence to suggest the recent rally against the emerging market currencies is also about to stall) would boost base metal prices!
But remember, metal prices have rallied alongside the US dollar over the past few weeks, so the situation is not that simple. Nothing ever is.
A better way of thinking about it in my opinion, is that if the US dollar, commodity prices and the US stock market begin to stall, it will simply be because they have run out of steam after the post US election rally. And gold and T-Bonds may be the beneficiary of that.
All a lot of conjecture, but at least we can see a possible scenario emerging. But that is all it is--a possible scenario. Unfortunately, it will either fail or come to pass after this last report of the year is written.
And what about oil, after the surge last week? It is still trading in the range that has contained it since June.
And what about a possible alternative scenario?
After all, it is getting close to Christmas and I am sure we will be subjected to the calls of a possible "Santa Claus rally" which we often get this time of year. Many commentators suggest the Santa rally is the tendency for the stock market to rally in the month of December.
And the old Wall Street adage that "if Santa Claus should fail to call, bears may come to Broad and Wall" is part of that so-called Santa Claus rally.
It is funny how facts and sayings can get muddled over the years because, according to the Stock Trader's Almanac, (which is the so-called bible as far as seasonal trends are concerned) the Santa Claus rally "is the upward move in stock prices over the last five trading days of the year and the first two days of the New Year".
So basically, it begins on Christmas Eve--not before as many suggest.
All of the above was written ahead of the Italian referendum outcome. The "no" vote has pushed the euro lower and has had a negative effect on global equity markets. Gold has edged higher.
The fall in the euro may take out the support I have highlighted and if so, that would eliminate part of the possible scenario I have outlined above. But this could just be a knee-jerk reaction and I would give it a day or two to resolve.
Nothing ever pans out exactly how you expect it to, and when pulling a lot of inputs together to form a possible outcome, sometimes there could be one part of the equation that is out of whack.
But it is always important to look at the "big picture", digesting what is happening in all the markets, not just focussing on the charts of individual asset classes. But whatever happens to the euro, I think there is still room for caution in global equity markets.
Thanks for reading and I wish all of you a happy, safe and peaceful festive season.
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