Market in need of a breather

10.08 AEDT, Monday 22 October 2012

Market in need of a breather
By Ric Spooner (Chief Market Analyst, CMC Markets)

Stock markets were becoming increasingly vulnerable to a correction after the consistent rally of recent weeks. Against this background some disappointing US earnings announcements on Friday coupled with a lack of specific progress at the Euro leaders’ conference proved the catalyst for a significant sell off.

This is likely to flow through to the domestic market today. The Australian share market has rallied without any significant pull back since its low on 5 September. After a rally of several weeks, buying tends to run out of steam while profit takers become more trigger happy. It’s likely we are now in one of those situations.

NAB’s cash earnings pre announcement on Friday may also continue to be a negative influence leading into ANZ’s result on Thursday. The banking sector has run hard recently as investors chased yield. NAB’s below consensus result may give investors reason to pause until they get more clarity on bank earnings.

Wednesday’s CPI release will be closely watched. Investors will be looking for an inflation rate which gives the RBA unambiguous scope to reduce interest rates further if economic growth remains soft and the Aussie Dollar stays high. With the introduction of the carbon tax providing some distortion to the CPI in the September quarter, analysts will be focussing on the trimmed and weighted mean measures. As long as these stay at or below the low 2% range, the RBA is not likely to see inflation as a barrier to further rate cuts in the near term.

For technical analysts, the question to be resolved in coming days is whether we will see a relatively shallow correction of the move since 5 September or alternatively a correction of the major move since the June low. The outlook for a larger correction would be enhanced by a move below support at 4403 in the S&P/ASX 200 index. A correction of the whole move since June could see the market pull back to the 4200/4350 zone. If we only get a minor correction the pullback may not move below the 4420/4460 zone.

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