More important reading today, focus on S&P 500 analysis - ASX futures down 181 points

My observations today are characterised by four themes:

  • There is a confluence of analysis predicting consolidation and/or a bounce in the S&P 500 above 1,800 points (93 points or 5% lower than last night's close)
  • There are some striking similarities to the intensity of this sell-off to that of August 2011
  • One-day falls in the 500-point-plus region for the Dow Jones Industrial Average trigger emotional pain linked to the GFC, which precipitates capitulation
  • Emerging market economic growth contraction has been previewed (already) in Australia due to commodity exposure

To the first point, and I don't know whether it is a good or a bad thing that I'm reading similar views on the prediction that support zones above 1,800 in the S&P 500 will trigger a bounce - on the one hand if enough of this type of analysis is employed, one could see a rush of money come back to the market at or around that level; on the other hand, the market could ignore it and if the velocity of selling doesn't slow down, there will be no confident buying teased out to consolidate and slow the current move. So where does that leave short-term traders? To be frank, (and to conservatively set expectations) the selling trend in global equities is not showing any significant signs of slowing yet so if I were to pick a likely direction I would say that the trend will remain down and be dictated by US investor sentiment best reflected in the price of the broad-based S&P 500 index, shown in today's first chart. It is here where we rely upon a slowing of the pace of selling as that market approaches the 1,800 point level (to be precise, 1813.50 for S&P 500 futures, being the October 2014 low). This is key and is what anyone trying to find a decision point right now should be focused on, in my opinion.

(I will note, without any fanfare or particular confidence at this stage, that S&P 500 futures hit a low and recovered last night to the extent that we haven't seen in the previous three sessions, it could be the beginning of a slowing of the rate of selling, let's see.)

There is a popular signal used when attempting to predict the exhaustion of selling into lows for the S&P 500 called the S&P 500 Bullish Percentage Index, which analyses the movement of the individual constituents and rates the number of stocks triggering sell signals. This chart has almost reached the levels seen in August and October 2011, at the same time as the S&P 500 is approaching the kinds of peak-to-trough % falls (~16%) from July to October 2011. But if we are to use history to predict the future (which is not particularly reliable), we should be looking for some additional market weakness that could play out over weeks or months. This period probably won't be characterised by the level of volatility that we've seen in the past two sessions (otherwise we'd be really stuffed), but it could suggest that the reliable next up move might not emerge for another couple of months.

This morning I received an SMS from an old family friend noting that he was "terrified" by what the market was doing. I don't blame him, because--emotionally--these moves take a lot of people's minds straight back to October 2008. For clarity, those 2008 DJIA moves were in the six and seven hundreds, and were coming off a lower index level thus constituted higher percentage falls. Nonetheless, a certain pain threshold is being met and any short-sellers fuelling this dive will be looking for that last breath out from sellers capitulating before covering their positions and likely triggering buying.

The last point I will make is that while the S&P 500, Dow Jones Industrial Average and NASDAQ in the US have been powering along (and European market--despite the Greek issues--had been fuelled by European Central Bank bond buying), the Australian equity market has for some time been under-performing those markets significantly because we felt the contraction in growth from emerging Asian markets far earlier than they are all feeling it now. Think prices in copper, iron ore, gold, silver, as well as mining & mining services companies and the financial drag that less tax has put on the Australian economy. We shouldn't be falling in moves of the same magnitude of the US and Europe, but the world is seeing this as a global growth problem that we all share. Nothing much we can do about that, but look out 12 months from now and consider what corporate Australia will look like. To me, companies on the ASX 200--particularly after the falls we saw linked to the 2015 earnings season--are not overpriced and buyers will be picking their marks as these irrational falls create buying opportunities.

Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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