FNArena’s Weekly Insights – October 30 2023
A Market Of Contradictions
By Rudi Filapek-Vandyck, Editor
This might seem contradictory, but it’s simply part of the market being the market: from a technical analysis perspective, the outlook for equities is improving, at the same time as underlying fundamentals are revealing a number of red flags.
Let’s start with the good news first.
The performance of the ASX200 in Australia is now negative for the running calendar year, including dividends paid out, and the index is below the level from which global markets bottomed in late 2022.
Over in the trend-leading USA, the S&P500 is now down more than -10% from the year’s July peak, with market technical readings flashing equities are currently deep in oversold territory.
A number of technical market analysts are pointing out, whenever markets reached similar levels of being oversold in years past, a bounce, or call it a rally if you like, has always followed. While the exact timing can never be forecast, certainly not with war and bond yields front of mind, more weakness from here onwards will simply put readings below last year’s level, and define markets as even deeper oversold.
Viewed from a different angle, the S&P500 tends to have a -10% “correction” on average every 1.6 years while 94% of calendar years experience at least one drawdown of at least -5%. The past 24 months have seen the S&P500 drop by at least -10% on four different occasions. The current downward-trending move is number four.
The previous three occasions saw the index retreat by respectively -13.05% over 64 days, -20.83% over 79 days and -16.91% over 57 days. While the current move has the index only down -10.20%, it started in July and is already 88 days old.
The duration rather than the move itself is what is feeding into renewed optimism. In particular since the annual seasonal pattern suggests most calendar years end with a positive move upwards, colloquially labeled the Santa rally.
On some forecasts, this year’s end-of-year relief rally could be as powerful as +10%-12%. It sounds as just what the doctor ordered for local share market investors that haven’t had a lot of long-lasting joy since the Fed and other central banks started tightening in early 2022.
The ASX200 closed off 2020 with a reading of 6587. Nearly 34 months later the index is trading at 6772.
