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S&P fails to break out again

Four markets in focus today: GBP/USD, US 500, Australia 200 cash and China A50 cash.

US 500 (S&P 500)

The S&P has failed again at the all-time high of 1850.84 and while we saw a move above this level there is little conviction to close above here. The bulls would dearly love to see a close above here in the short term to warrant an extended move.

GBP/USD

On the hourly chart cable has completed a bullish ‘flag’ pattern, suggesting the recent consolidation phase could be at an end. Importantly, the pair has found support and rallied off the 38.2% retracement of rally from the recent 1.6251 to 1.6823 move. Momentum indicators on the daily chart also look bullish and therefore this pullback could be a good buying opportunity. Fundamentally it should be a busy night for sterling traders with Q4 (preliminary) GDP out at 20:30 AEDT (no change expected at 2.8% annual growth), business investment, private consumption and exports. On the USD side of the equation we get new home sales.

Australia 200 cash (ASX 200)

It’s a busy day of earnings, so stock pickers will be looking out for names that have sizeable moves on the day. Scheduled to report we have MSB, BUR, RRL, WOR, SYD, WOT, SVW, WRT, LLC, AGL, BCI and FLT. BCI is an interesting stock and has been seeing increased volatility of late, certainly not helped by a falling iron ore price. Iron ore fell very modestly yesterday and is a commodity clearly on everyone’s radar (now at $119.1). However, the fundamentals of BCI are very compelling and there are few companies in the ASX 200 that can boost to have return on capital of 22%, free cash flow per share of 93% and consensus projected sales growth of 64%.

China A50 cash

Chinese markets are in freefall and price action is looking very dicey. The China A50 cash is the top 50 mainland Chinese stocks, however the futures market settles on the Singapore exchange. Given non-residents (of China) cannot trade the CSI 300 and Shanghai Composite due to its closed capital accounts, this index is the best and cleanest way to get direct exposure to China.

The 30-day correlation between the A50 cash and the Shanghai Composite is currently at 90%, so while many will look to hedge China concerns using the AUD, this is in fact a very poor hedge (given the very low correlation) and thus I would always look at trading the A50 cash index. Valuations on this market have never been cheaper, and globally it looks like one of the cheapest markets, however sentiment is the driver right now and it seems the market is finding reasons to sell at every turn.

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