MARKETS SPECTATOR: Buy the breakout

The agreement on Greek debt has given risk assets a welcome boost, while investors will be eyeing a December rally in the run-up to Christmas.

It’s been another strong session for the local market after late morning news of an agreement on the Greek debt situation boosted the broader index, in particular risk assets.

This Greece issue has been hanging over the market for a few weeks now so its definitely positive to see it put to bed for the short term at least. Whether or not it’s a long-term solution remains to be seen but it it will allow markets to look past it for a little more time.

European finance ministers, the ECB and the International Monetary Fund agreed to a plan that will see Greek government debt fall to 124 per cent of GDP by 2020, which will pave the way for the country to receive its next financial aid payment.

Whilst no one really knows whether this is just another case of ‘kicking the can down the road’, it does relieve some short-term uncertainty, which can only be a positive heading into the historically strong December period.

image
Source: Iress

The above chart shows the strong bounce we have seen over the last seven trading days. The S&P/ASX 200, which looks very similar to the S&P 500, now finds itself at some short-term resistance levels.

It is sitting just below the short-term downtrend and horizontal resistance lines, which intersect just above the 4450 level. Whilst the market could break up through these levels in the immediate future, I think the most likely outcome is for the market to consolidate recent gains for a few days before making another push higher.

Another factor supporting the bull case is that December is historically the strongest month of the year for equity markets, as measured by the S&P 500. The chart below shows that over the last 20 years, the S&P 500 has usually formed a low around mid to late October before beginning a strong rally into the festive season.

So far this year, the low was formed around the middle of November, which is a little out of whack but not so much to ignore the fact that December usually brings gains. In fact, since 1940, December has shown a positive performance 75 per cent of the time, logging an average monthly gain of 1.55 per cent.

image
Source: EquityClock.com

On top of all this, there are a number of other interesting indicators all pointing towards further upside gains for the S&P 500. One of the more watched ones is the put-call ratio.

According to investopedia.com, it’s the ratio of the trading volume of put options to call options, which has long been viewed as an indicator of investor sentiment in the markets.

The 21 day average of equity-only put-call ratios is signalling a buy signal, much like it did back in June. A 100 point rally in the S&P 500 followed. The VIX, or fear index is also gathering investor attention.

It has generally been in a state of decline in recent months, even though the S&P 500 has been declining. This indicates that there isn’t much demand for portfolio protection in the short term, which can only be viewed as a positive.

So there are a number of factors suggesting we may be set for another December rally. However, a decisive breakout through current resistance levels will be needed to confirm a likely move higher.