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Global market events push local index

10.01 AEDT, Monday 4 February 2013

Global market events push local index into technical resistance zone before reporting season

By Ric Spooner (Chief Market Analyst, CMC Markets)

Weekend news that China’s non-manufacturing PMI rose last month should frank the firm market tone set by Friday’s positive news on US jobs and manufacturing PMI. With China’s services sector now making up around 45% of GDP, a PMI reading of 56.2 helps cement the outlook for overall growth of 8%+ in the March quarter.

As it heads into the reporting season, the local market is also approaching a zone of technical resistance after gaining nearly 6% so far this year. The current rally is mainly about asset allocation and valuation adjustment rather than improved earnings outlook. With many investors’ overweight cash and bonds, money is coming back into equities as investors chase yield pushing price earnings valuations higher.

In this environment, the market may be in a relatively forgiving frame of mind this earnings season. Disappointing results may not be punished to the same extent they were in recent years while positive outlook comments from good quality, high yielding stocks may attract more buying pushing PE values higher.

Even so, the looming resistance levels and consistency of the recent rally create an element of short term risk for the market. We may need a better than expected earnings season to push the index higher without a short term correction first.

There is initial technical resistance around 4940/4950 from the top of the trend channel that has been in place since mid-November. Beyond that the 4976/5025 zone represented the market peaks in 2010 and 2011 and will again form potential resistance. Last week’s low at 4866 represents initial support and below that the early January peak at 4750.

Today’s building approval numbers will be watched closely. While this is a traditionally volatile series, investors will be looking for signs that the trend improvement in recent months is continuing. This will indicate that the domestic economy is beginning to respond to lower interest rates and the outlook for rising house prices.

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