MARKETS SPECTATOR: A sector by sector surge

Some of the key commodity-linked sectors have swung behind the market's recent high-yield driven rises, making for a truly bullish benchmark.

The market is firmly in the hands of the bull at the moment as indices globally continue to push higher, shrugging off all the negative headlines and ‘climbing the wall of worry’.

As we’ve been saying for a number of weeks now, the market is telling us one thing and one thing only; the path of least resistance is up, despite all the ‘how bad everything is’ headlines.

In fact, the S&P/ASX 200 index is now up 15 per cent from the mid-year lows and 11.4 per cent for the YTD.

The bulk of the rally since mid-year has been built on serious buying among the high yielding sectors as investors, both domestic and global chase a real yield. Now we’re really starting to see the commodity-based sectors get involved too as money begins to flow back towards China-facing assets.

Here are some charts to show what’s going on.

Weekly chart of the materials sector

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Source – Bourse

The above chart shows that the materials sector has broken out from its 18-month long downtrend line and is butting its head up against resistance. We expect this resistance to be broken in the not too distant future.

Weekly chart of the energy sector

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Source – Bourse

Similar to the materials chart, we can see that the energy sector has broken out from its down trending channel and now looks to be heading towards the resistance level market. We would expect a break of this resistance in the short term too.

Weekly chart of the financials sector

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Source – Iress

The above chart of the financial sector shows the strong uptrend in place (participants chasing yield) and the subsequent breakout through the resistance level (labelled support). It now looks to be headed towards the above resistance level, which is the highest level for the sector since the bottom of the market in March 2009.

So, three of the heaviest weighted sectors in the local market are all moving in the right direction, hence the real momentum we’re seeing in the S&P/ASX 200 benchmark.

Weekly chart of the S&P/ASX 200 index

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Source – Bourse

As we can see, the momentum in the above chart is clearly to the upside after it broke out of its recent trading range (labelled support). It’s now heading towards the resistance levels above which will probably see some sort of a correction, but ultimately be broken in the future.

Whilst the performance of the high yield sectors has been spoken about at length, the big difference emerging now is the participation of the commodity or China facing sectors. Participants are fast coming to the view that we’ve probably seen the bottom of the Chinese slowdown in the third quarter. Today’s swag of Chinese data also helped support this view.

The short or underweight China trade has been very successful for the last couple of years but now people are starting to realise that the bulk of the gains have been made and that its time to start reversing those positions. The energy and materials charts above confirm this view.