Weekly Wrap

Market Update

Calendar Icon   Friday, 18th June 2021

ASX 200 Index (XJO)

This week we take a longer look at the XJO, using the chart below. It is a monthly chart that allows us to determine a strong trend channel. The current channel started forming when the world was coming off the worst of the GFC, in February 2009. Subsequent trading has seen a clear trend develop, with the XJO recently hitting 7400 points.

The sell-off from last years pandemic induced crash was quickly reversed and the past year has seen a solid uptrend. However, in technical analysis when a price meets a long-term trend, it is normally associated with a reversal. Looking at the chart, the touch points of the channel have resulted in a solid reversal in the market.

The current touch point for this trend channel on the upside is at 7500 points. Therefore, the XJO still has room to move before it reaches a major resistance point.

XJO Chart

Market Snapshot

Volatility Index (VIX)

Volatility Index

ASX Sector Movements

ASX Sector Movements

ASX Index Movements

ASX Index Movements

Triple Witching Day

This Friday in the US is expiry day for options, equities and futures on indices. It is also the day when the S&P releases the changes to the indices based on market capitalisation. This means that there is a chance of higher volatility in the markets tonight.

There are trillions of dollars in options tied to benchmarks, which may lead to some turbulence as the market is conditioned to stability. What this means is that the big end of town have been selling options based on volatility. This has resulted in the narrow ranges and low volumes we have seen over the past month.

Sellers of options over indices tend to trade the underlying stocks to hedge their positions. If they are faced with unwinding their option trades as the benchmark changes, there might be a large swing in prices as the market adjusts.

We note that periods of low volatility are always followed by high volatility. Tonight might be the time when this change occurs.

During the week, the Fed announced that they see interest rates rising, but only minor increases and not until 2023. They believe inflationary pressure is under control, and the market agrees with them, especially the bond market. To read more about the current market and the influence of the Fed, click here.

The Fed will be keeping a keen eye on the US 5-Year Treasury, which has declined in line with the rally in stocks over the past year. The “real yield” is displayed on the chart below. However, the recent inflation figures have seen the 5-Year attempt a double bottom. As the chart indicates, if the yield rallies above -1.65%, the next move will be higher. This would see interest rates increase sharply.

US Treasury Real 5-Year Yield