The Big Picture - Australia 200 Index
In Australia, there was a 10% correction in the index between April and June last year. While this removes the time pressure felt in the US, any further significant falls in American markets are likely to have a local impact. And on the longer term weekly chart, there is a clear break of the up trend.
It’s fascinating to hear the explanations for the recent falls. As my London colleague Jasper Lawler put it, markets overnight were hit by the three “E”s – Europe, Ebola and Earnings. Jasper talks daily with traders about market drivers in what is still the centre of the financial world, so there is no reason to doubt these are important current market themes.
If we step back, the fact that these are cited as key concerns tells us more about market thinking than the state of the world’s economy. After all, sluggish prospects in Europe are hardly a surprise. Similarly, while Ebola is a human crisis, the potential for global economic disruption is very low. And earnings season is yet to begin. In other words, these are “after the fact” explanations for the falls, rather than than likely drivers. These explanations also ignore obvious positives for global markets – particularly clear evidence of an accelerating recovery in the US and confounding stable growth rates in China.
It appears investors believe a correction is “due” – and if enough investors believe that is the case, it will become a self-fulfilling prediction.
If further selling hits share markets, where are the potential turning points for the Australia 200 index?
First, the RSI cannot be ignored. Currently under the 30% mark, it is in oversold territory, and at three year lows. The potential for a bounce at any time must be factored in to market thinking.
However, if the market continues to slide there is a chart point where a number of positives come together. Note that the 38.2% retracement level at 5033 roughly coincides with significant support around 5040-50. Additionally, at levels around 5050 the dividend yield argument kicks in – with the index yield greater than 6% once franking credits are factored. In the absence of a global or local economic catastraphe, this could be the level where the market “safety net” catches any further falls.
Frequently Asked Questions about this Article…
The recent decline in global share market indices is attributed to a combination of factors, including concerns over Europe, Ebola, and earnings. However, these are seen as 'after the fact' explanations rather than direct drivers. Many investors feel a correction is overdue, which can become a self-fulfilling prophecy.
The US SPX 500 Index has not seen a correction since July 2011, and any significant falls in the US market are likely to impact the Australian market. This is because global markets are interconnected, and movements in major indices like the SPX 500 can influence investor sentiment worldwide.
Potential turning points for the Australia 200 Index include the RSI, which is currently in oversold territory, and the 38.2% retracement level at 5033. Additionally, significant support is noted around 5040-50, where the dividend yield argument becomes attractive with yields greater than 6% when franking credits are considered.
Investors believe a market correction is due because the US SPX 500 Index has experienced one of the longest correction-free periods in history. This sentiment, combined with global economic concerns, leads many to anticipate a pull-back, which can become a self-fulfilling prediction if enough investors act on this belief.
The RSI, or Relative Strength Index, is a key indicator in market analysis for the Australia 200 Index. Currently, it is under the 30% mark, indicating oversold conditions and suggesting the potential for a market bounce. Investors use the RSI to gauge market momentum and potential reversal points.
Franking credits enhance the dividend yield of the Australia 200 Index by providing tax benefits to investors. When factored in, the index yield can exceed 6%, making it an attractive option for income-focused investors, especially during market downturns.
Despite recent declines, there are positive factors for global markets, such as clear evidence of an accelerating recovery in the US and stable growth rates in China. These factors provide a counterbalance to concerns over Europe, Ebola, and earnings.
Investor sentiment can significantly influence market movements. If a large number of investors believe a correction is due, their actions can lead to increased selling pressure, potentially causing the anticipated correction to occur. This highlights the psychological aspect of market dynamics.
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