MARKETS SPECTATOR: Healthy correction

The market yesterday snapped a seven-day winning streak but in a way that suggests there is still plenty of upside.

When a market undergoes a correction in an uptrend you want to see it decline due to a lack of buying and some light profit taking, rather than broad-based selling on heavy volumes. This is what we have seen so far and will likely continue during today’s session, which is a perfectly healthy situation.

Yesterday’s modest pullback finally saw the seven day winning streak snapped as weak leads and a complete lack of buyers saw the index decline under its own weight. This wasn’t surprising at all as seven straight gains meant the index had run too far in the short term.

With markets in the US under pressure in late trade, it looks like another flat to weak start for the benchmark S&P/ASX 200. Just before US close, the S&P/ASX 200 SPI futures are predicting an open around the 4480 level.

We remain of the view that the rotation towards housing stocks and beaten up consumer discretionary names will continue given the outlook for a record low interest rate environment. On top of this, the small to medium cap miners will remain supported following the swag of predatory takeover bids seen during the last few trading sessions.

Looking ahead, traders will be keeping an eye on the 1130 AEST release of NAB Business Confidence as well as a speech at midday by RBA Deputy Governor Lowe.

Interestingly, the Australian dollar saw a bit of a bounce overnight as the bulls continued to protect yesterday’s early morning lows of 1.0150. It’s currently trading around the 1.02 level and is likely to head back lower again in the short to medium term as the outlook for interest rates and slowing commodities and mining environment see long Australian dollar positions pared back.