ASX eyeing a break of the October 2015 highs

It’s a feel-good ‘hump’ day and while we see an open for the ASX 200 at 5376 (+0.6%) the real victory will come if the index can close above 26 October high of 5384.

Source: Bloomberg

Taking the time-frame out, the ASX 200 lost 21.5% between 13 April 2015 and 10 February 2016 (or 212 trading sessions), so impressively a close above 5384 should see the index re-claim 50% of those losses in a mere 62 days. Specifically, watch price action from 10:15 (AEST) just after the unwinding of the market, which will say a lot about the psychology of market participants. Will traders fade the strength, or continue to push stocks higher and potentially above 5384? This could be a very telling session on who is in control of this market.

Certainly, the ASX 200 and Asian markets more broadly have been dealt with a perfect storm, with a modest gain in steel and iron ore futures, and a stronger move higher in oil, although the API oil inventory data (+3.4 million barrels added) does not bode well for tonight’s official DoE inventory report (00:30 AEST).

The S&P 500 has flown, on reasonable volume just 11% below the 30-day average, which is not terrible. It’s really interesting that there was absolutely no move in the bond or investment-grade credit markets, while the USD was flat, so this really is an equity and commodity story. There doesn’t seem to be one smoking gun as to the moves. While there have been a raft of explanations, they all seem unlikely to cause a 1%+ move in stocks. Sometimes when the bulls want to buy, they’ll buy. The target now of course is whether the S&P 500 can push into 20 April high of 2111, which to be fair is a mere 2.4% away. The all-time high is 3.5% away.

The Aussie market is a pure macro play right now though. Banks will continue to move higher because the market senses further rates cuts, while the dividend yield in the space is significantly more compelling than that of the bond market, especially when adjusted for inflation. The daily chart of the financial sector looks truly bullish and currently at the highest levels since 6 January.  CBA seems pivotal to the broader market, so watch for a daily close above the March high of $78.53. The sector should get the extra kicker from the VIX being at a lowly 13.6%, so the combination of low volatility, positive offshore leads and comparatively lower bond yields is a green light for traders to buy banks. Material and energy names will do well because of higher commodity prices, which are likely to open 3.5% higher.

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