Trader’s Thoughts – Are markets looking at the retest they have to have?

The pullback we had to have?

To channel a former Prime Minister, price action in the last 24 hours is beginning to indicate the start of the pullback we had to have. As touched on before, making such assertions sounds cheap: if you keep saying a pullback will come enough, then eventually you will be right. That much is true, but the benefit of making such assessments isn’t to be right, but rather provide a reference point to analyse current market dynamics. The “model” is this: fall-rally-retest-rally. The basis of the concept is that it helps understand, in the bigger picture (months to years, rather than days to weeks), at what stage of the lifecycle the market is in. That is: are we still in a bull market, or are we experiencing the beginnings of a bear market?

A bullish trend is still in place

Current market activity has the cards stacked in favour of the former. However, there’s still a large and vocal section of the market believing we are still in an evolving bearish trend. Therefore, the fall-rally-retest-rally “model” is important – and why continually asking the question whether each down-day in the market is symptomatic of the start of a retest is relevant. Since the Christmas Eve market trough, and the subsequent January global equity rally, the market has – as can be inferred – only ticked off the two first stages of the “model”. Considering how overbought global equities have become in the short-term, and given the growing pessimism towards global economic growth, it’s prime-time that the market enters the next “retest” phase of this “model”.

How far could a retest extend

It’s best not to jump the gun too much, however if a “retest” is coming, but the next question will be where does the market register its next low? A higher-low of course will be hoped for by the bulls but considering there is – if using the S&P 500 as a benchmark – a 16.44% range between the Christmas eve low and the most recent high in the market, there is ample room for the market to fall before registering the next trough in the cycle. Again: using the S&P 500 (as the locus of equity market activity in recent months, this is justified) the cleanest point the market could look to pop-in a new low is at the crucial support/resistance level around 2600/2630 – a level where the bulls toiled so hard recently to break-and-hold above.

Slower growth, low interest rates

It would be illustrative too to discuss why last night’s pullback in European and North American markets occurred. Simply, the slower global growth story took hold of the narrative and therefore market sentiment. The culprit for rehashing the story came out of Europe this time, after the European Commission released downgraded forecasts for the continent’s economic growth. It’s estimated the Eurozone will grow at a paltry 1.3% this year, compared to previous forecasts of around 1.8%. It’s already being priced in by markets: given that some manner of a global economic slowdown in upon us, the notion that any central bank of a developed economy will possess the data-impetus or the intestinal fortitude to hike interest rates this year is becoming increasingly ludicrous.

The age-old debate

For those who can remain impartial amid the fears of a looming global economic slow-down, 2019 could prove the year that begins to answer the question about what, in our post GFC-world, is and has been the driver for the last decade’s stock market boom. The binary is this: has equity market performance in recent history been tied to true growth fundamentals, or has it been a function of central bank fuelled credit and enhanced liquidity? It’s been a debate that’s raged for decades, but especially since the beginning of the “easy money era”. The reason why a flash-point could be upon markets now, is that for the first time in some-time, a cyclical economic slow down is indicating central bank’s may soon have to enter a new easing-cycle.

The Bank of England took its (dovish) turn

It’s a scary proposition, frankly, that with the major developed economies boasting interest rates at historic lows, central banks may soon need to be easing policy once again. As alluded to, this may not be so bad for investors – taking aside the moral implications, more cheap money could boost asset prices and make the propertied class even richer still. In reality: scanning across the data-map, there’s little in the way of price-evidence that suggests rates anywhere are moving higher. The BOE, for one, last night met, downgraded their own growth forecasts, and essentially stated what the markets were anticipating: Brexit is starting to take its toll on the UK economy, and until its resolved, conditions for “normalizing” interest rate settings will stay elusive.

The ASX 200 to follow Wall Street

SPI Futures are suggesting the ASX 200 will follow the lead of Wall Street and shed approximately 36 points at the open this morning. It’s been a down-day for the bulls, and despite a valiant push late in US trade following news that US President Trump and his Chinese counterpart Xi Jinping plan to meet to discuss trade in early March, that rally was promptly faded. Today’s trade comes on the back of a tremendous rally in the ASX 200 yesterday, which saw the index fly to, and dutifully respect, 6100 resistance. The day looks like it will be stifled by overnight’s negative sentiment, however for market-obsessives, today’s RBA Monetary Policy Statement is the highlight, although its unlikely anything will be revealed in that document that isn’t already known.