Trader thoughts - The long and short of it

The US healthcare act has acted as a source of market angst in the past week. However, this remains in the background with President Trump stating they have until 22 May to pursue the Obama administrations appeal to provide subsidies to insurers.

Market Data
Source: Bloomberg

The removal of the subsidies will force the participation rate to lower, which will lead to higher premiums. This is the outcome president Trump was referring to when he stated Obama care would explode.

Sean Spicer, the White House spokesperson, stated that ‘there is a balancing act to add votes without removing the main components.’ The news flow overnight is suggesting another House vote next week, which seems a touch bizarre to me. Either way, the market seems to be getting comfortable with the continuing efforts of the administration to stay focused on the election agenda.

Although distracted by this for the past week, traders have moved on to the fact US companies are offering a growing earnings cycle. With this in mind, the next round of reporting is expected to show 7% growth in company earnings-per-share (EPS), the future growth figures are expected to continue to show the US economy is gaining momentum.  

All the key US indices are still trading below the 1 March high, but making all of the right moves to regain these lofty highs.

Overnight, the US crude oil inventories print showed an unexpected decline in inventory build with the oil market attracting a bid pushing spot prices a full 2% higher.
The higher draw on gasoline inventory, immediately flowing through and lifting the spot price trading to just shy of the key $50 level last seen on 9 March.
In USD flow, the benchmark dollar Index moved back over the key 100 level last night, as dollar strength ruled over G10 currencies - the USD/JPY traded lower to 110.00.

UK Prime Minister Theresa May has now triggered Article 50, which markets seem to have comfortably priced in. The GBP/USD has seen largely, directionless flow and everyone is really looking at the Brexit timetable now for the next key date to promote greater volatility.

Our ASX 200 call sits at 5880, so some pockets of strength could be seen, but a flat open is largely in play. We could see this as a breather of sorts before we resume an assent into 6000, but I would also question if we’re starting to see signs of euphoria being priced in.
I suggested looking at the valuation of the ASX 200 yesterday and that the ASX 200 can squeeze into 17, perhaps 17.5x forward earnings. This would represent a strong premium to the long-run average and we know in the last decade or so this is a level the fund managers have been happy to increase cash weightings in the portfolio.

The Aussie equity index currently sits at 16.24x - it’s expensive, but not outrageous by any means. What is flashing red though, are the market internals and if we go off Mr Buffett’s rule of being fearful when others are greedy, then there are signs that this may be in play. However, if you read Twitter (as a proxy of retail sentiment) you would still feel the world is about to cave in.

We can see 29% of ASX 200 companies above their top Bollinger Band, which is actually the highest percentage reading since February 2015 and the second highest reading in the last five years. It shows a sizeable move away from the mean (i.e. the 20-day moving average) and the prospect of reverting to this mean is elevated – in essence, the elastic band has been stretched a touch too far. We can also see 40% of ASX 200 companies are at four-week highs, while 82% of stocks are above their 50-day moving average. These internals are not at a confluence of extremities, but they will be, if the market can get to 6000 in the next week or so.

Therefore, I am willing the market into 6,000, as the prospect of a market trading closer to 17x forward earnings, extreme readings displayed in the market internals and huge technical resistance would mean fantastic shorting opportunities. Keep in mind that SPI futures traded to 6011 in March 2015, so the futures market will be heavily traded going into this level. That’s if it gets there.

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