Fairmont Equities Managing Director Michael Gable provides an update on the share market.
The share market has had a rough few days and this week we saw it reach new lows for the year. The longer-term picture looks positive from a macro perspective. Unfortunately, the short-term movements can be front of mind for many people. So I thought I would send a quick update on what we are looking at at the moment and why we believe there is nothing to be concerned about.
The Australian market, as we know, has been trading in a sideways range all year. Recently it fell to the extreme low of that range. Those that follow our analysis know that we picked March as a major turning point and opportunity, the set-up right now looks the same. An oversold RSI doesn’t occur often at the index level, and just like in March, we have one here (circled). We are also seeing US markets with the same oversold indicators.
Markets are currently worried about rising bond yields. Group-think is now saying that yields are going to be “higher for longer”. Firstly, if we look at the 10-year US yield, you will notice that it has recently moved up in a vertical fashion and extended out of its recent channel. This is known as a “blow off top”. It is an extreme move that comes at the end of a trend. In stocks, we often see this as a FOMO move. They can go on longer and higher than expected, but one thing is almost always true with vertical moves like this – they don’t consolidate by heading sideways. They come back just as quickly as they go up.
Let’s look at the longer-term chart of 10 year yields. At no point in history do the spikes higher then result in a sideways move. If we see yields “higher for longer,” then that would be truly remarkable. Once again, rates overshoot on the upside and then head lower just as quickly. They may not be back to 2020 levels, but they will be quite a bit lower from their peaks.
A snap back in yields could be due any day now. That will cause the US dollar to fall again, and all of this will be very bullish for stocks.
It is natural for bearishness to appear very extreme at the lows, just as jubiliation is never in short supply at the top. Overall, while we would like to see markets move higher every day, we don’t believe the bearishness from the past few days will continue on for much longer. My stance remains to be a buyer of stocks for my clients at the bottom of the range, not a seller. I have reserved most of the selling for when we are at the top of the range.Ends
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