Plenty to be nervous about
After a brief respite, the stock market looks like coming under pressure again today. Profit taking and caution ahead of the profit reporting season, has seen US markets set a weak tone for our market this morning. Lower commodity prices are also likely to contribute to early selling pressure.
The US stock market has outperformed most other major markets since Janet Yellen’s speech last week. US markets have reacted to a “Goldilocks” scenario of moderate and ongoing economic growth assisted by a weaker currency, which combined with very low interest rates. However, valuations on US market have recently been pushed to levels where it’s is not surprising to see some profit taking. The forward PE for the S&P 500 index climbed to around 17.6 which is not far short of its 18.1 peak last year.
The sharp drop in copper prices overnight will not help sentiment towards mining stocks today. The impact of weaker commodity prices may be partly offset by a sharp decline in the Aussie Dollar. However, in these volatile times, investors are likely to be cautious. If recent commodity price weakness develops into a test of the January/February lows it will trigger another bout of fear driven volatility in resource and energy stocks.
Bank stocks are arriving at levels that will represent a test of just how pessimistic investors are about the outlook for deterioration in bad debts. CBA is currently trading at around 12.7 times earnings. It’s also moving into a chart support zone that has halted its decline on four separate occasions since mid-2013. This support extends down to the 50% retracement level at around $69. At that level the stock will have lost half the capital gain it made between 2011 and 2013.