Are we about to see a market bubble burst?

Expect another day of hushed trading as the market continues to bide its time ahead of the mass data releases at the end of the week. 

NYSE trader

There was plenty of which-way trading overnight, with oil falling as the current crises in the Middle East, Eurasia and now Libya have yet to affect the oil flows from these regions. US ten-year yields rose two basis points after having hit the resistance zone of 2.45% to 2.47%, which looks to be the limit where bond values get too high, while equity markets bobbed with minimal fuss.

This kind of trading certainly gives a feeling that the market is coming close to a tipping point; the question is whether it’s a tip up or a tip down.

Interestingly, the measure(s) that may give some insight into the short-term direction is market talk, rather than a specific gauge or index.

More and more newswires are concentrating on terms like ‘bubble’, ‘overvalued’, ‘overstretched’, ‘premium pricing’ etc. There are even stats that are now being released as to how many times these bearish phrases are being used.

Take the term ‘bubble’ (used in the context of markets): in 1999 it is estimated the press quoted the term ‘bubble’ 6800 times; in 2000 the bubble burst. In 2007 – bubble was used over 6850 times, then in 2008 another bubble burst in the form of the GFC. In the near enough to seven months of 2014, the word bubble has been quoted and estimated 4600; if that is annualised it will be approximately 7850, so where does that put 2015?

It’s an interesting thematic to look at, in that it can almost be considered a self-fulfilling prophecy. The people writing about ‘bubbles’, ‘overvaluations’ etc. are the ones that are directly involved with the market itself, and will position themselves accordingly. It then simply becomes a numbers game as more and more move to a bearish stance, which will lead to a slide.  

However, not all are feeling the heat from bearish calls. China has just entered a bull market, having seen stabilisation data over the past four to six weeks, meaning the likes of copper, the China A50 and the Shanghai composite have been steadily increasing.

What put a rocket under the mainland index yesterday is a market rumour that the Shanghai-Hong Kong Connect plans are back on the table after falling through in 2007.

This would mean mutual market access between Shanghai and Hong Kong, which would be the first major step towards opening mainland China’s financial borders and may even reduce the discount gap Shanghai suffers from compared to its offshore counterpart. The news sent blue chip stocks surging and they will pump up even higher as the plan become clearer; this is a positive for the whole Asian region as it will allow capital to find an easier way to China and for China to access markets abroad.    

Ahead of the Australian open

It is another light day of news meaning we are currently calling the ASX 200 four points to 5573, however its more likely that end of the month trading could start early ahead of Thursday’s close. The spot iron ore price was not released as Singapore had a public holiday and the on-sale price will not have been recorded, meaning materials play are free to react to the news from China.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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