MARKETS SPECTATOR: Shrugging off negativity

The Australian market refuses to be shackled to the steep declines in US stocks. Investors seem to think it's a local problem.

The outperformance we’ve seen from the Australian market post US election is nothing short of remarkable. The power of money flows, quite simply! When was the last time the S&P 500 fell 3.57 per cent and the S&P/ASX 200 was down 1.3 per cent.

In fact, if you exclude 19 index points of dividends from Westpac and National Australia Bank then the Australian market is only down 0.9 per cent, which is a great performance.

A lot of what we’re seeing in the US is very country specific. It’s becoming clearer that alongside the fears surrounding the fiscal cliff, there’s a lot of profit taking going on as well. With talks of potential changes in US taxation, especially surrounding capital gains tax and income tax, the profit taking has intensified as participants try to avoid potentially higher taxes next year. This is most evident in Apple, where many investors have been sitting on huge capital gains.

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Source – Bourse

The above chart just shows how investors have been willing to step into the market and buy on the dip, grateful that they do not have to chase prices higher. The market opens down significantly in the morning and then the buyers push it higher throughout the session. There is so much money underinvested that it’s simply a supply/demand game.

As I wrote yesterday in Rising tide, we expect to see this outperformance continue for some time yet.

S&P 500 index dips below the 200 day moving averages.

It’s probably the most well-known and watched technical indicator. It’s commonly said that the bears live below it and the bulls above it. Yet, it’s still just a technical indicator and therefore not an exact science, by any means.

There has been a lot of hoo-hah overnight after the benchmark S&P 500 index closed below its 200 day moving average. However, it’s nowhere near as simple as ‘it closed under its 200 day moving average so therefore its heading lower’.

The real test is how the index reacts around the 200 day moving average. For example, if the S&P 500 were to continue declining, then rally back up to the 200 day moving average and turn back lower, then that would be a worrying sign as it is showing us that there is significant selling pressure.

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Source - Iress

On the flip side, a move back higher after touching or briefly trading below the 200 day moving average indicates buyers have stepped in at a key support level, much like we saw in August this year (circled above). In that scenario, the 200 day moving average is acting as a dynamic support level.

So until we see further trading action around this level, we really can’t come to any foregone conclusions.