The Aussie market continues to hold on to its January gains, having recorded its best January performance in over a decade. Volatility continues to contract, as investors remain comfortable with the current state of the market. The retailers continue to have the greatest level of short interest for stocks on the S&P/ASX 200 index. Investors should be taking this opportunity to protect their recent gains.
The bulls continue to control the market as we start February, and trading volumes are steadily improving. February is a busy time for Aussie investors as the reporting season gets underway and many stocks will be going ex-dividend in the next six weeks. Over a dozen stocks hand down their interim results on Tuesday.
US investors had their best January since 1997, as the Dow Jones Industrials rose 3.4% for the month, the S&P 500 was up 4%, while the Nasdaq outperformed up 8%. The earnings season has been exceeding expectations and the US financials have held on to their record gains. Manufacturing figures are improving globally and a reading on US manufacturing came in at 54.1 for January (up from 53.1). There is a lot of hype about Facebook’s announcement to IPO to the tune of $5 billion and Apple has been confirmed as the largest corporation on the boards (outsizing Exxon Mobile Corporation).
The Federal Reserve Chairman Ben Bernanke addressed US lawmakers overnight, describing the pace of the US economic recovery as “frustratingly slow” and warned of the importance of addressing the US’s fiscal challenges, highlighting that eurozone sovereign-debt crisis is an example of out-of-control fiscal policies. Bernanke fell short of reaffirming a QE3 package, however. Traders will be focusing now on the US Non-Farm Payroll monthly employment figures out tonight.
European markets are continuing to melt-up, with the European Stoxx 600 index holding at 6-month highs. Globally investor sentiment has been boosted by successful eurozone bond auctions with borrowing costs continuing to pull back, despite the Fitch ratings agency downgrading Italy, Spain, Belgium, Slovenia and Cyprus, and cutting the outlook for Ireland. Sentiment has been buoyed by the news of a successful “fiscal compact”, as all but two of the European Union countries have agreed to sign a treaty designed to stop overspending on the eurozone, and put an end to the bloc’s disastrous debt crisis, while also pledging to stimulate growth across the region.
European shares have continued higher this week after data showed that the ISM manufacturing index climbed to 54.1% in January. Additionally manufacturing data from Germany, the U.K. and the eurozone all boosted sentiment as the German PMI rose to 51.0 in January (up from 48.4), while eurozone PMI rose to 48.8 in January (above estimates of 48.7), while London the UK PMI hit an eight-month high of 52.1 in January (up from 49.7).
The eurozone debt crisis continues to simmer under the surface though, as there is concern that Portugal may be the next in line for a Greek-style debt bailout. The European leaders and Greek bondholders are still in negotiations over the Greek bailout, where Greece has to write down the country’s debt by EUR100 billion. A resolution is essential, as Greece must repay EUR14.5 billion of maturing debt in March to avoid a default.
Asian markets returned from their Lunar New Year holidays and traders played some catch-up. The key data point for the week was the Chinese manufacturing activity figures coming in better-than-expected, but this did heighten concerns that the government may not need to immediately ease its monetary policy. The Chinese official Purchasing Managers Index (PMI) was reported at 50.5 in January, up from 50.3 in December (above expectations of a drop to 49.5). 50 is the level that delineates expansion and contraction. The Chinese market is approaching 2-month highs.
The Aussie market has once again found medium-term support around the 4200 level and has finished higher four of the past five weeks. The market appears to be setting up for a retest of the multi-month highs around 4350, as the upcoming reporting season may well be a trigger for this move. This week we found support around the 4200 level and we are now trading above the 13-day moving average, which sits around 4230. Many of the S&P/ASX sectors are looking to test their 150-day moving averages near term, which could give some pause as these levels have held prices in check for the past six months. The Materials, Industrials and Telecoms sectors are in uptrends, while the Financials and Energy sectors look set be testing overhead resistance. Defensive sectors such as Utilities and Consumer Staples look to be losing favour.
The next dividend season begins in February, so you can look to boost your yields through options strategies. The MDS Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Investors should also be looking to utilise options strategies to protect their positions, as options are a relatively cheap form of insurance, given the falling volatility of late.
Remain attuned to the news from overseas, particularly from the eurozone, Greece and China in relation to easing policies, and the US with their earnings season. Monitor the performance of the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 index is currently trading at 4255 and is trading above the key pivot level around the 4180. Key levels for the index next week will be 4180 and 4320, with 4230 the key pivot level.
By Michael Hevern
MDS Trading Desk
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