Trader’s thoughts – ASX set to dip following another Wall Street sell-off

Friday’s volume was extraordinarily high, especially in the Dow Jones, which saw activity 140% of its 30-day average.

Wall Street rout:

Wall Street capped-off last week with another day of considerable losses, even despite Europe posting an okay day. Come the end of the trading session, the Dow Jones had lost 1.81 per cent, the S&P 500 had lost 2.06 per cent and the Nasdaq had lost 2.99 per cent. The fact markets are entering the thin holiday period doesn’t help. One assumes that many-a investor would be rather reluctant to be sitting at Christmas lunch this year holding open-positions in equities given this market. Friday’s volume was extraordinarily high, especially in the Dow Jones, which saw activity 140% of its 30-day average. That statistic is particularly remarkable when considering that the past 30 days have seen volumes at levels very elevated by broader historical standards.

A down day, week, month, quarter:

Looking at the S&P 500 as the natural benchmark, US equities have shed 12.5 per cent so far in December, and 17.1 per cent in the fourth quarter. The 14-day RSI is flashing signs of an oversold market presently, however historical trading patterns suggest the S&P can dive lower, and momentum indicators are showing bearish-momentum is still building. A technical bear market, defined as a 20 per cent drop from previous highs, looks reasonably imminent given the current context. The Nasdaq, for one, is already there. Perhaps another concerning signal, IG’s sentiment measure is indicating traders are 70 per cent net long the S&P, implying that many traders may be trying “catch a falling knife”. If big-money keeps selling, the unwinding of these long positions could hasten the market’s tumble.

Market-wariness:

With all of this in mind, even if this bearish-trend feels overdone, and that therefore an inevitable bounce must be in store, it pays to understand this can get worse. That isn’t to prophesize and suggest that it will, but more that these circumstances require higher vigilance. As the cliché goes, the trend is your friend: with panic causing normal behaviour and correlations to break-down, falling back on that one may be comforting. Of course, these ideas only speak for 50 per cent of the traders in this marker presently. The uber-bears – particularly the ones who have been calling a central bank engineered market burn-out for years – are presumably feeling vindicated at-the-moment. If not that, then at least a little richer this Christmas than compared to last year’s.

It’s still the Fed:

To address the driver of current market activity: it is still fundamentally about the Fed. There seems to be an unshakeable notion held by market participants that the US central bank is way off the mark with their policy and views on the economy. A handful of central bank speakers have hit the hustings, so to speak, in the last several days to defend the bank’s position. An interesting question that keeps getting asked (more-or-less) is if by the bank’s own modelling inflation is going to undershoot, why lift rates now at all? The answer is frequently something that resembles the “data dependant” line, made to mean that the Fed’s forecasts are dynamic and therefore so is their decision making.

Trump’s Powell-problem:

The problem is, traders aren’t buying it: they likely want to hear here-and-now that hikes will stop. It’s been made a little more difficult in the last 48 hours to get a read on how this sentiment is evolving in markets. Looking at US Treasuries for one, there’s been a slight risk premium seemingly priced into yields after US President Trump drove the US government into shut down over the weekend. This may be exacerbated today and into the week by reports over the weekend (since denied by White House Treasury Secretary Steven Mnuchin) that the US President had several serious conversations last week about firing Federal Reserve Chairperson Jerome Powell because of the central bank’s recent policy actions, and views on the US economy.

Political instability:

He couldn’t do it, could he? According to many, legislation does open-up the possibility that a President can fire the Fed Governor for “cause”. It’s an ambiguous one, and a low probability event at this stage. But all this institutional dysfunction is spooking market participants. Not that the political instability hasn’t been the norm in last few years; the perception is though it’s getting a trifle worse. It’s an international phenomenon and strikes at the core of international political system. It’s manifesting in Brexit, in US politics, in France’s yellow vests movement, in the trade-war – and on and on. Financial markets take an amoral position on such subjects; however, they do manifest emotion, and right now the political climate is leading to a lift in fear.

Australia:

Trading in sympathy with Wall Street’s rout on Friday, the last traded SPI Futures price has the ASX 200 opening 40 points lower today. There’s been a level of bemusement in the financial press about how rapidly this sell off took hold. Another down day today brings into clearer view the boundary line of the ASX200’s post-GFC bull-run trend channel at about 5380. The Aussie Dollar will also be an interesting one: it tumbled to rest on support at 0.7040 over the weekend. As fears build about the strength of the Australian economy, and greater volatility in global markets leads to diminishing risk appetite, an AUD/USD exchange rate with a 6 in front of it at some point this week is becoming a stronger possibility.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

See an opportunity to trade?

Go long or short on more than 17,000 markets with IG.

Trade CFDs on our award-winning platform, with low spreads on indices, shares, commodities and more.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.