Investors watch their backs as share market rally continues

Investors watch their backs as share market rally continues

09.32 AEDT, Monday 18 February 2013

Investors watch their backs as share market rally continues
By Ric Spooner (Chief Market Analyst, CMC Markets)

Australian investors head into a new week with markets in a familiar mode for 2013.

We begin the new week with the promise of a firm start as values continue to push higher. Although the index is pushing short term technical resistance and the 16% rally since November has many tipping a downward correction, valuations are by no means stretched given current low interest rates. In these circumstances, the catalyst for a significant market correction will need to involve a major change to the current risk outlook.

In a week likely to be dominated by company profit reports, the weekend’s Italian elections will also be closely watched. Although the market has responded positively to perceptions that the risk of a short term Euro crisis has receded, many remain concerned about the longer term risks. The health of the Italian economy will be a key factor. A return of Berlusconi’s right wing populism or a weak coalition government would both be sources of concern for markets.

Markets are now speculating that former finance bureaucrat, Toshiro Muto may be appointed as Governor of the Bank of Japan. Mr Muto is generally perceived as being more moderate than some other candidates. In the long run, this may not be a great concern for markets. Even with a somewhat more moderate stance, a change from the previously conservative BOJ policies and the maintenance of the recently announced 2% inflation target will be seen as a medium term plus for Japan’s growth prospects.

Release of January’s motor vehicle sales statistics this morning will provide further insight into the strength of the domestic economy. Motor vehicle sales were an area of strength over the past 6 months. Continuation of this trend would indicate solid consumer and investor confidence and be a counterpoint to the weaker, but more difficult to interpret retail sales figures.

From a technical analysis point of view, the market begins the new week at the upper resistance line of a trend channel that has defined the trend since November. While the S&P/ASX 200 index has rallied 16% since November, it has paused every time this resistance has been reached. If this behaviour is repeated, we may see at least a minor loss of momentum or correction in the near future. However, given the strong overall trend momentum, it would take a break below a zone of support around 4950/4900 to indicate a more significant correction. This support is made up of the bottom of the trend channel and the 20 day moving average.

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