I believe we have seen the high until we know who is in the White House for the next term. As I write this Thursday night’s move highlighted why I have been cautious leading into September and being an election year with polar opposite candidates for the US election, the run into the November could be a graveyard for traders.
There are few worthy points to note as to why equity markets could work their way lower, bleeding off a lot of the excessive bullishness that has overcome investors with the Nasdaq 70% more expensive than in March.
1) Thursday night’s move so far has only worked off a small portion of the overbought conditions that US equities had reached. Even on a simple trend-following basis the Nasdaq, Dow Jones and S&P 500 have only returned back to their 21 day moving averages. There is still a lot of downside to be seen before we reach oversold or even neutral conditions. I think the Nasdaq could see another 8-10% from Thursday’s close.
2) History has shown that the seasonally volatile months of August to October experience short sharp declines – typically for about two weeks. The pullbacks are deep but relatively short lived. It therefore suggests that this weakness could snowball and at the very least it will be at least two weeks before a meaningful can be found and then weeks after that before constructive price action returns for the indices and many individual stocks. Stocks that matter to the indices.
3) Not all of the three major US indices made new record highs. Only the S&P 500 and the Nasdaq did so. The DJIA failed to do so. I recall back in 2002 – post the 9/11 optimism that like Covid – surprised many pundits with its strength, didn’t all make new highs in March. At that time only the DJIA made a new recovery high and that inconsistency gave way to healthy decline. So there is precedence of markets not all making new highs simultaneously that is a warning signal for market corrections.
For the ASX 200 below, the index is likely to work its way back to the 5750/5600 range. The MACD is on the verge of breaking zero and whenever has done so leads to a healthy decline. Moreover the RSI is also still in neutral territory and not yet at oversold conditions. Take also into account that the banks are non-exciting, the Buy Now Pay Later stocks have run into a wall of competition from Paypal, Visa, Mastercard and American Express (who all make healthy profits…..), the resources are resting, retail sector is very expensive, it is difficult to see what can lift the index back up right now. Yes, there are pockets of mid and small-cap stories that excite but with my expectation of further downside for the US markets, its certain Australia will too.
I mentioned back in April in this column that market was heading to fresh new record highs (#newhighs) on the back of technology stocks and that the influx of new traders/investors was a recipe for a massive boom. This has played out and those ingredients that sparked the best performing period in US equity history just don’t look so appealing tasteful now.
The past doesn’t always forecast the future, just like the market failed to keep heading lower in April like so many believed because February and March were one-way traffic south. Now the market is unlikely to keep heading higher just because it had been on a runaway tear for the past five months.
