The stock market will kick off the new trading week in a positive frame of mind

Over the past nine trading sessions, the ASX 200 index has gained nearly 5% and looks likely to open higher this morning. The recovery continues to be supported by another good earnings season for US stocks.

Bank stocks have led the recent recovery so the results of NAB and ANZ due on Thursday and Friday will be key factor to maintaining the recovery’s momentum. While the banks may benefit from increased housing lending, focus will also be on trading results in a volatile market. Bank balance sheets and capital management will also be an issue amidst forecasts that the Murray enquiry will require increased capital to support housing loans.

Steep initial recoveries have been a feature of stock market trading in recent years. Once bargain hunters decide the correction is over, they have tended to pile in pretty quickly. It’s hard to find value or yield anywhere else. This time around has so no exception but a key difference has been the extent to which the broke below support on the way down.

From a charting point of view, the jury is still out on whether we are in the early stages of a “V” shaped recover and a push to new highs or just a corrective rally. If it’s a corrective rally, it might either be part of a broad sideways move or a short lived gasp of optimism in a deeper move lower. It will be a matter of watching to see what signs the rally produces. Right now we’ve arrived back at the 200-day moving average.  The average itself has flattened out indicating the potential for a choppy, range trading scenario. It would take another move lower in the near future to see the average start to roll-over which would be a bearish development.

For further comment from Ric Spooner please call 02 8221 2137.