MARKETS SPECTATOR: Fiscal fillip

Hopeful remarks from the key players in US fiscal cliff talks and a better than expected capex result at home has consolidated the recent rally.

After a sluggish start to the session, especially given the strong overnight leads from the US, the local market has gathered momentum, seemingly boosted by the positive rhetoric from President Obama and Congress spokesman John Boehner regarding fiscal cliff talks and the stronger than expected Australian private capital expenditure data released at 11.30am.

This short term rally is now nine trading days old, which means there are likely to be a lot of people starting to question their assumption that this was just a short term bounce. Normally, after such a move lower, you would only expect a bounce to last three to five days before the sellers moved back in.

However, this has not been the case and we’re now starting to see positive developments on the index charts.

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Source – Iress

The above chart of the S&P 500 is starting to look reasonably attractive. Firstly, its worth noting that the current pullback to below the 200-day moving average is very similar to what happened in June, when the market subsequently rallied more than 10 per cent.

Secondly, last night saw the S&P 500 decline to the 200-day moving average in morning trade, where it found buying support and rallied from. This is a very significant sign as it indicates that the 200-day average is now acting as support rather than resistance.

It is also very encouraging to see that it has broken up and remained above the short-term downtrend line drawn.

Returning back to domestic shores, price action in the S&P/ASX 200 is basically mirroring the US market.

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Source – Paritech Pulse

As you can see in the above chart, after pausing yesterday the S&P/ASX 200 has today broken up through the short-term downtrend line, which is a very clear indication that momentum is switching to the upside.

This combined with the fact that we are entering the strongest month of the year, in terms of equity returns, presents a pretty interesting opportunity.

Yes, there are plenty of risks in the world but, right now, the market is telling us that it’s fairly comfortable where things stand. At the lows, it had priced in the worst-case scenario with the upcoming fiscal cliff but now it seems the market is looking at the situation with much more rational eyes, as well as paying attention to the continued improvement in US economic data.

Who knows whether that will continue but right now, it looks like the odds favour a Santa Claus rally.