MARKETS SPECTATOR: Up and away down under

Australian and US markets are in conflict as the local index maintains outperformance while Wall Street tacks sideways and back in light of a fading QE3 and the looming election and fiscal cliff.

Trading action this week has been dominated by offshore weakness as the peak in the US earnings cycle looks to have finally caught up with ‘QE3 boosted’ stocks, especially the technology sector.

Whilst there has been a lot of stock specific news locally, the overall market seems to be driven more by what’s happing offshore.


Source – Iress

The above chart depicts what has been happening in the S&P 500. We can see that the market tracked sideways for a number of weeks before coming under significant selling pressure over the last week. It now looks likely to test the key support zone around the 1400 level, which will be absolutely crucial as to whether this correction remains a relatively shallow one or if it deteriorates further into a deeper trading correction.

So far, it’s looking like a relatively quiet and calm correction with the markets only down around 4 per cent and that has occurred over the best part of 40 days since the market high. It would be a lot more worrying if it had all occurred suddenly over a week or so without any warning.

With the bulk of the third quarter earnings season behind us, market attention in the US is already turning to the presidential election in under two weeks, as well the much talked about fiscal cliff. Let’s face it, no one has a clue as to how these two events are going to affect markets. There is one thing we do know, however, and that is that markets don’t like uncertainty. So until we get a much better view on these upcoming events, especially the cliff, it looks like US markets, at best, will remain range-bound.


Source – Iress

There has been a lot spoken about the outperformance of the local index recently, and the above chart shows just that, with the S&P/ASX 200 in blue and S&P 500 in green. Over the last rolling month, the S&P/ASX 200 is up 3.02 per cent versus a 1.42 per cent decline in the S&P 500. For the rolling quarter, the outperformance is even greater with the local benchmark up 8.34 per cent versus 3.89 per cent for the S&P 500. And this outperformance is expected to continue.


Source – Iress

The above chart of the S&P/ASX 200 index paints a much healthier picture when compared against its US counterpart, with the uptrend well and truly intact. There is minor support around the 4480 level and then a major support zone around the 4450 level labelled, which also coincides with the rising uptrend support line.

As we’ve seen on numerous occasions in recent weeks, the demand on the pullback should see this market very well supported if these support levels are tested. The demand from cash that needs to come into the market will simply outweigh any supply side selling.

Looking ahead, it appears as if the local bourse will continue to outperform the US and other global markets as money continues to flow towards equities, especially on the dips.

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