One of the more interesting ways of looking at markets is through breadth. This should therefore provide a sense of the level of participation from equities in a rally or sell-off at one time.
The issue of poor market breadth is certainly something that is occupying the mindsets of the US equity market bears right now and they would have been enthused by the price action in US tech yesterday. If we look at the S&P 500, there has been a textbook uptrend in play for a number of years now, however, if you look at the number of stocks trading above their 200-day moving average, the trend is convincingly going the opposite direction.
We saw a 9.8% pullback in the S&P 500 through Q4 2014 and during this period, the level of stocks on the NYSE trading above their 200-day MA fell to a low of 29%. However, as the market recovered and pushed to new highs, we naturally saw this percentage increase the 60% level, although this level has fallen back to a lowly 41%. Especially given the S&P 500 is 1% from its all-time high.
There is no discernible trend here in Australia, with the percentage of stocks above their 200-day moving average showing a strong correlation with the index. You also see this in the level of stocks making new four-week highs and as things stand, this stands at 11% (of ASX 200 companies). This is well below the 50% we saw in February when we saw the strong rally in the market.
You could make an argument here that when the market undergoes a strong move (in the ASX 200) participation is broad and a rising tide generally lifts all ships. Traders are not as selective as they are in the US for example, where we are seeing leadership in a much more concentrated segments of the market. You can see this front and centre when selling in Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) sent not just US markets lower, but it seems these two stocks have been responsible for the MSCI World Index falling 0.6% yesterday too. This also highlights that if trading the Aussie market, you have to get a firm grip on macro and sentiment as they are such key inputs.
In China, the level of stocks making a new four-week high on the CSI300 is a lowly 2%, having been as high as 50% of the market in the lead up to the June peak. You can also see the percentage of companies above their 200-day moving average was 100% from March through to June, which is unprecedented in global equity markets. This shouldn’t surprise too much, such was the rampant euphoria that saw the market cap of the Chinese market as a percentage of the total world market cap increase from 7.6% to 13.75%. This percentage now stands at 10.43%.
Interestingly, Chinese equity markets are seeing green on screen, with the Shanghai Composite gaining for a sixth straight day. Goodwill has been spurred on largely by further encouraging narrative on the front page of the Shanghai Securities News (quoting researcher Xi Xianrong) that ’China shouldn’t withdraw stock support measures near-term’. The fact that 18% of stocks are still suspended is probably helping to a degree.
Other market views:
There have been some positive flow into Japanese markets. However, the bears continue to the get the upper hand in Australia, with the material sector down for a fourth consecutive day. Copper seems to have encapsulate the markets view again given the strong downtrend in play (since 18 May) and Goldman Sachs (NYSE:GS) cutting its 2016 forecast by 19% and 2017 by 35%. There has been some buying in front month CME copper futures around $2.40, but rallies into downtrend $2.50 look like selling opportunities.
There have been a raft of production reports. FMG have felt the full force of the bears by admitting that the current strip mining rates are unsustainable and these will likely rise. NCM looks to have produced good numbers, but who wants to own a gold company right now? Still, from their perspective they are winning the trust of shareholders again and, as they were keen to point out, they have exceed output guidance for nine consecutive quarters.
On the subject of gold, there is some focus on $1087 (the 50% retracement of the 658% bull move seen from 1999 to 2011). If we see price close the month below $1,087, then a move into $890 should be on the cards, although with the marginal cost of production (Source: Wood Mackenzie) at this level, it could be an excellent buying opportunity.
Today’s RBNZ meeting was a pure exercise in understanding market expectations and positioning. The door is clearly open to further moves lower in the cash rate. However, there seem less urgency and therefore the pace of price decline should abate. One of the key points has been a slight change in the language around the currency, which isn’t necessarily a surprise given Prime Minister John Key’s recent comments and the 12% decline in the trade-weighted NZD since April. The central bank toned down its view around its desire for further weakness removing the reference to the ‘unjustified’ levels, merely stating ‘further deprecation is necessary given the weakness in export commodity prices’.
Technically NZD/USD is in a textbook downtrend and the 20-day moving average (currently NZD$0.6654) has contained the rallies since May. Therefore, it will be interesting to see how the pair reacts if we see a move into this short-term average. Downtrend resistance is subsequently seen at NZD$0.6750, with the 9 June high of NZD$0.6771 also in play.
There is pronounced double top in AUD/NZD. A close through the neckline at NZD1.1019 would see the pair target the NZD1.0650 area.