Capitulation, or the Beginning of the End
A wild night on European and US bourses will put Australian investors’ nerves to the test today. A late bounce in US trading has futures indicating a RISE at the open today, despite shares closing firmly in the red after the rally. Trading today is further complicated by index options expiry, lower commodity prices and the release of local housing and inflation expectations data.
A number of commentators are pointing to a further rout in oil prices as the catalyst for the fall. The logic is tenuous at best. Oil prices are falling because supply is increasing – not due to weakening demand. While this may have deflationary impacts, on balance lower input prices for companies are good for profits and the broader economy. The coincidence of falling oil and share prices suggests this is a sentiment rather than analysis driven sell down.
Investors may take comfort that major global indices have hit significant support levels. Further selling from this point would provide a signal to chartist that markets are going much lower. However, a bounce in the Dow, Nikkei and S&P 500 in the next session would attract technical based buying.
The most important question for markets is whether last night’s huge trading ranges and sharp turnaround represent a capitulation, or the beginning of a much deeper problem. Just as bull markets often end with “blow-off tops”, bear markets end with the last bulls capitulating, and cutting their positions. The other view is that the wild market behaviour is a sign of further instability to come. The next twenty four hours are crucial to the near and medium term outlook for markets.
Frequently Asked Questions about this Article…
The recent wild night on US and European markets is expected to test the nerves of Australian investors. Despite shares closing in the red, a late bounce in US trading suggests a rise at the open today, influenced by factors like index options expiry and local economic data releases.
Oil prices are falling due to an increase in supply rather than a decrease in demand. While this could have deflationary effects, lower oil prices generally benefit company profits and the broader economy. The simultaneous drop in oil and share prices seems to be driven more by market sentiment than by fundamental analysis.
Investors might find reassurance in the fact that major global indices have reached significant support levels. If further selling occurs, it could indicate a deeper market downturn. Conversely, a bounce in indices like the Dow, Nikkei, and S&P 500 could trigger technical buying.
The current market volatility raises the question of whether it represents a capitulation, where the last bulls give up, or the start of a more significant issue. The next 24 hours are crucial in determining the short- and medium-term market outlook.
Lower commodity prices can complicate trading, but they also reduce input costs for companies, potentially boosting profits and benefiting the broader economy. However, the current market reaction seems more sentiment-driven than based on these fundamentals.
Technical indicators are crucial in the current market environment. If major indices bounce back, it could lead to technical-based buying. However, if they continue to fall, it might signal to chartists that markets could decline further.
The next 24 hours are critical for the stock market's near and medium-term outlook. The market's reaction during this period will help determine whether the recent volatility is a temporary capitulation or indicative of ongoing instability.
Everyday investors should focus on understanding the underlying reasons for market movements, such as changes in commodity prices and technical support levels, while keeping an eye on global indices' performance to gauge potential market trends.
Call 1300 880 160
Start a chat
Schedule a call
