Weekly Wrap

Market Update

Calendar Icon   Friday, 9th July 2021

ASX 200 Index (XJO)

We mentioned the bar pattern that the XJO entered a couple of weeks ago. The 133 point fall on 21st June set the pattern that we still face today. For the XJO to continue the rally, it needs to close above the 7368 high set on that day. As we can see from the chart below, the market is looking for direction as it has been trading sideways over the last three weeks and is trading at near month lows.

At time of writing, the XJO was down 100 points at 7240 and is moving close to this support level. A break of this level next week would be a technical signal that the rally from the lows in March 2020 was over, or at least for the short term.

Market Snapshot

Volatility Index (VIX)

ASX Sector Movements

ASX Index Movements

Come on in, the water’s fine

It is one of the truism’s of investing that the time to be fearful is when there is no fear. To recognise a lack of fear there are a number of readings that we can look at, including the Volatility index (VIX). In our market the VIX has been trending down for many weeks, yet this week it has jumped over 30% to sit at 15 and still sitting within its normal range.

Complacency is widespread in the share market at the moment with many media reports likening the current conditions to those back in the 1920’s.

Stocks Are Setting Up for the Roaring ‘20s Again?

Get ready for a new ‘roaring 20s’, says value veteran

Back to the future: 2020s to echo roaring 20s or inflationary 70s?

Is this really the case? Or is the media simply reporting current views without looking at some aspects of the market?

Let’s have a look at what the share market and economy is telling us.

Momentum

Whilst the S&P500 made a new high this week, the percentage of shares above their 50-day moving average was 46.5% on June 29th. Currently, only 30% of S&P500 stocks are outperforming the index on a rolling 21-day basis. This has occurred only 2% of time going all the way back to 1927. In the Dow, 18 of the 30 stocks that make up the index have failed to register a new high since 10th May. Some stocks gave up months ago, as we can see in the chart below.

Investors

Large and small option traders (defined by their average trade size) are at record levels of exposure. This extreme was last seen back on 10th March 2000, the last day of the ‘dot-com’ boom. Equity trading volume for retail investors was at 23% of all trades for the 1st quarter of 2021 in the US, a sharp increase from over 10 years of data. The level of bullishness is at an extreme with a Charles Schwab survey of 1,000 clients revealing that 72% of them are bullish or ‘very bullish’.

Retail Portfolio Cash Levels

Currently, the average retail portfolio is holding just 2.13% in cash, which is the lowest level on record. Holding cash at the moment is considered to be the ‘dumbest’ strategy’ for investors, yet the likes of Crypto currencies, NFT’s and SPAC’s are down 50% in the past few months. The safety of holding cash will roar back into life if these markets continue to fall.

China’s debt

Zombie companies are increasing in China. The zombies cannot generate enough money to pay their interest payments on the debt they owe. China Evergrande Group, the world’s most indebted real estate company with strong ties to the CCP, has been borrowing prolifically in recent times to reduce their debt to equity ratio below 100%, having sold their stakes in electric vehicle units for US$8bn. However, the debt is still demanding more than they earn and the share price is falling.