Morning Note - Markets look to take a breather on light volume

** 29/03/11  - 8.40am  -  by James Gerrish** 

(Click to View Charts)       S&P/ASX 200  (Australia) -  Dow Jones Industrial Average (US)     -     FTSE 100 (UK) 
 

• The Australian market finished down about 9 points yesterdaywith some softness in the miners largely offset by some support for the banks.
• Volume on the ASX was woeful with only $3.3 billion worth of stock changing hands - the lowest since the 28th Feb when we had public holidays in some states - on a fair playing field you could probably call it the lowest volume day this year (outside of holiday periods) 
• The ASX has now recovered 56% of its recent falls and those that look at Fibonacci will be keenly watching the 50% retracement region as a potential point of resistance

• The main issue with the recent rally has been volume. Low volumes = low convictionand it appears that a lot of investors are hanging out for some further clarity around the Middle East situation. 
• Last night, we saw the US indices finish marginally lower with the DOW JONES off by -22 points or -0.19% to close at 12197.
• Another night of very thin volumes on the NYSE with most support coming from the Commodity and Finance space while Energy shares were the biggest drag after a pullback in Oil.  

• Locally, the FUTURES markets are pricing a rise of +4 points this morning however I think this may be a little optimistic – I’d expect the market to be lower today.

• Looking at the technical reports that I receive, the majority are suggesting some near term weakness or some consolidation at least in the US market. 
• I think this assessment has a fair chance of playing out because of the two different views currently playing out in the market. 

• 1.You were either a buyer when the market started to turn from the recent pullback because you believed that these were short term factors impacting the price of equities and this presented an opportunity - we were in this camp.
• 2.Or you were sceptical that the pullback would be more pronounced because 'why should equities be trading as high as they are anyway! The economy is still weak and stocks have run too hard too fast".

 

• If you're in camp 1, you'd probably be sitting on your hands for now happy with your entry prices in some key stocks like QBE and WBC.
• If you’re in camp 2, you'll still think that equities are overbought and be holding out for some more protracted weakness.

• I remain in the bullish camp and this is largely based on a couple of key factors which I'll discuss below - but markets do not move in a straight line.

• So why do I remain bullish for the year ahead?
• US economic data continues to improve and I think we'll see a strong employment number out at the end of this week. 
• US corporates are generating cash with the S&P 500 trading on a P/E of 11.7 times - historically low – so valuations at the moment are not stretched.  
• QE2 is still in place and will run through to June - Its hard to get bearish when the Fed is pumping funds in the system. I am conscious of this and when QE2 is pulled, I think the market will react negatively (short term). 
• Emerging markets remain resilient and growing strongly - Although China is tightening policy, I'm of the opinion that they will manage this process well. 

• Inflation is the big elephant in the room and you'd be a brave person to bet against this theme. In an inflationary environment, physical assets appreciate and it prompts people to spend rather than save - which is a positive for economic growth. 
• I'm a little bit more concerned about Australia with the Aussie dollar up at 28 year hjghs last night. There will be very little overseas investment in Australia with the Aussie Dollar at these levels. Manufacturing will be a fast depleting industry in Australia.
• This also goes some way to explain the under performance of the Australian Equity markets against global peers. 
• The big news to watch this week is the employment data out in the US on Friday. Expectations are for +200,000 jobs to be created.

• Stocks trading overseas

• In New York, News Corp rose by US$0.02 to US$18.10, equivalent to A$17.67, A$0.03 below its last close on the ASX.
• ResMed fell by US$0.02 to US$30.03, equivalent to A$2.93, A$0.01 above its last close on the ASX.
• In London, Rio Tinto rose 35.5 pence to £42.79, A$0.55 higher in Australian currency terms.
• BHP-Billiton rose 15.5 pence to £23.64, A$0.24 higher in Australian currency terms.
• Henderson Group Plc rose 2.4 pence to £1.70, A$0.04 higher in Australian currency terms

James Gerrish 
(02) 9375 0117