Overnight: October Low

By Greg Peel

Support Tested

The ASX200 traded straight down in the first hour yesterday, as we might have expected, and broke down through technical support at 5650. However, having traded as low as 5635, very quickly the index bounced.

For the next three and a half hours, the index traded sideways along that support level before another dip at 2.30pm. It was then buyers came into the banks and big miners to save the day, and a close of 5671 was clear proof support had held. Bit of a pity, then, that the Dow was down -550 overnight.

I’d say it’s been a long time since we’ve seen every sector down on the day other than the banks, particularly with the RC in session, but financials closed up a lonely 0.5%. On the spread of movements across sectors, the trend suggests a shift into yield – banks and, these days, big miners – and into defensives. Materials fell only -0.1%, staples -0.3% and utilities -0.5%.

At the other end of the scale, IT fell -3.0%, once again mimicking the Nasdaq. It’s was Altium’s ((ALU)) turn to be the flag bearer, down -9.4%.

News spread that a long term holder of CSL ((CSL)) had decided to bail, following the stock’s -30% drop from its highs, and healthcare lost -2.5% on CSL’s -3.6% lead.

Other sector falls ranged from -0.5% to -1.5%, with consumer discretionary (-1.5%) really copping it these past three sessions just as Christmas ads begin to appear.

The worst individual performer on the day was Fletcher Building ((FBU)), following a downgrade to earnings and outlook at its AGM. It fell -10.8%.

The question now is as to whether the Australian market will continue to blindly follow Wall Street or will it start to become attractive as a safer haven from a foreign perspective. Yesterday’s late buying may have provided a hint. AGM season continues to cause individual train crashes in a time of strained sentiment, as well as the odd winner, as the global macro picture plays out.

Unfortunately, oil prices fell -7% overnight, which is not going to provide much room for technical support to again act as a safety net today. Other sectors would really have to do some work. The futures are down -65 this morning, which would take us well down through yesterday’s low.

If this continues, next stop 5500.

More of the same

Global growth is slowing, the pace of US earnings growth is set to slow in 2019, the Fed is tightening and prospects of a trade resolution seem remote. All of the above is weighing on US sentiment so after a very strong 2017, and a very strong nine months of 2018, it’s time to rethink.

The president no longer has control of Congress, and he has already unleashed his promised blockbuster policies anyway.

“Growth” continues to bear the brunt of what began as profit-taking but has now shifted towards “Get me out!” as the FANGs and others wipe out their gains for the year and “bear market territory” is an oft heard phrase. “Value” is back in fashion but the capitalisation of the growth sectors means a simple switch is not going to hold up the general market.

That capitalisation impact is cascading through all major indices and a very large number of ETFs. The popularity of ETFs as investment-made-easy instruments is coming back to bite. Computers don’t dither.

So, where will it stop?

All three major US indices are now back to square for the year, again. Last night the S&P500 closed smack on its prior October low level of 2641. That would be, as might have been the case with the 5650 for the ASX200, a good point from which to bounce after two sessions of wash-out. But looming in the distance is the February low of 2588.

It is quite possible – some believe quite likely – that that level has to be tested. Only then can Santa back out the sleigh. But it’s a very long way back to 2018 highs.

The plunging oil price was one trigger to send Wall Street tumbling again last night. Another was weak earnings reports from major US retailers, arousing concerns over the strength of the US consumer heading into “the holiday season”. The tail end of the long US earnings season is heavily weighted towards the retail sector.

At this stage sentiment suggests a bounce is not on the horizon, particularly in a holiday-interrupted week. But bounces only occur when not expected. It’s always darkest just before the dawn.

Memo to Fed – you have the power.

Is it a good sign or bad sign the the VIX volatility index on the S&P is only at 22? Back in February it leapt up to 40. It can either mean that, ultimately, Wall Street is not that frightened and had thought a pullback was on the cards anyway. Or it could mean misplaced complacency that can go very wrong.

Commodities

The three-day recovery in oil prices was far from convincing after such a big drop from the highs. As further data highlight the extent of US overproduction into a slowing market, last night’s dip back turned into a rush for the exits.

The further the oil price falls between now and early December, the more likelihood OPEC/Russia will look at production cuts.

The US dollar also turned around last night after a few days of pullback. Not good for a lot of US stocks and not good for commodity prices.

The Aussie is down a full percent at US$0.7218.

Today

The SPI Overnight closed down -65 points or -1.1%.

Tonight in the US brings data on durable goods orders, existing home sales and consumer sentiment – all rather important in the context. But tonight will see Wall Street rapidly emptying after lunch.

Locally, Fisher & Paykal Healthcare ((FPH)) will provide a quarterly update while today’s AGM list includes those of REA Group ((REA)), Sonic Healthcare ((SHL)), Seven Group ((SVW)), Webjet ((WEB)), Woolworths ((WOW)) and WiseTech Global ((WTC)).

The Australian share market over the past thirty days…