Markets globally look to be taking a healthy breather around current levels, although the domestic ASX looks have bounced back a little today after some selling during yesterday’s afternoon session.
Defensive sectors like property trusts, telecoms, consumer staples and financials are once again continuing to benefit from money flows looking to move into high yield assets as the lower interest rate environment forces investors to chase yield.
While this thematic has been in play for at least six months, I expect it to be around for much of this year as further interest rate cuts from the RBA make holding cash or cash products completely unsustainable.
On the cyclical side, we’re seeing some money flow out of the energy, materials and consumer discretionary sectors as they succumb to profit taking and weakness in today’s retail sales figures, which I might add will only add further pressure to interest rates.
Materials names have been outperforming significantly recently as the world continues to recognise that China’s recovery is gathering momentum and spot iron ore prices continue to bounce from their 2012 lows.
Again, I think the improvement in China and anything China-facing will be a theme of 2013. As I’ve written before, the market simply got way too bearish on China last year and was caught with its pants down as growth began to tick up and the bulk of the investment community were either underweight on China-facing assets versus their benchmark or net short, as much of the hedge fund world was.
As this positioning reverses, we should continue to see upward pressure on China facing assets.
The above chart spans two years and shows the spread between the Shanghai Composite Index and the S&P 500. The Shanghai Composite has underperformed significantly apart from the last two months. Most recently, we’ve seen a real rebound in the Chinese market, so much so that the downtrend above has been broken and it now looks the Shanghai Composite is going to see a sustained period of outperformance versus its US peer.
Taking a step back, markets have had a pretty decent ‘Santa Claus’ rally as the politicians in the US finally managed to hammer out a fiscal cliff deal, although everyone is now talking about the debt ceiling. Nonetheless, the market does not seem too concerned and just keeps on jumping over whatever hurdle is put in its way. Sounds like a bull market to me.
From December 17, 2012, when I wrote about the Santa Claus rally the S&P 500 is up 1.9 per cent while the S&P/ASX 200 is up 3 per cent. So it’s only natural and completely healthy to see markets having a bit of a breather.
In the above S&P 500 chart, we can clearly see that the market is right at a major resistance zone, which has resulted in the last few days profit taking. At this stage, it looks like an orderly pullback before the market makes another assault higher and tries to break through this zone.
While ultimately I think the market will break through to the upside, I think it could take a bit longer than expected as it represents the last major resistance zone until an attempt on the S&P 500’s all-time highs.
So while it looks like gains are going to be harder to come by in the US, the picture for the domestic market is rosier.
As you can see above, the market has recently cleared a minor resistance level which is now acting as support. Yet to the upside, the next major resistance zone is not until the 5000 level and slightly above. At this point, the Australian market seems much less likely to run into selling pressure in the short to medium-term when compared to its US peer.