What Now For Global Stocks After Big Rally?
What Now For Global Stocks After Big Rally?
US index futures were slightly positive ahead of the US open, while European markets traded mixed, with the FTSE outperforming and the CAC among the fallers. The German DAX index was trading flat. Profit-taking earlier in the week had caused the markets to weaken a little, before staging a bit of a recovery on Wednesday. After a big rally in the past five months, what’s next for the markets? Are we going to see more of the same, or perhaps a long-overdue correction?
Why have markets started Q2 sluggishly?
The somewhat sluggish start to Q2 comes after stocks had been on a blinder for the last 5 months, thanks in part to AI hype and optimism about potential interest rate cuts by the Federal Reserve, and other major central banks, later in the year. Since late October, the S&P 500 has shot up about 28%, so there was always the potential for some profit-taking which we got earlier this week. The key question is whether that was it, before we start to see clear blue skies for the indices again, or whether further weakness may be on the way.
In Europe, investors are now even more confident that the ECB will cut rates in June with Eurozone inflation falling more than expected to 2.9% annual rate in March from 3.1% in February. Another reason behind the sluggish start to the new quarter is that fresh bullish catalysts are diminishing, and question marks over valuations remain – not just for German stocks, but the wider Eurozone and US markets too. Domestically, the German economy has been struggling for a long time now, and for markets to keep pumping stocks higher, we will need to see the return of growth and fast to justify high valuations. While some indicators have improved for the German and Eurozone economies, further improvement in data is needed. So, the risk of a correction remains high, but before we turn tactically bearish on the likes of the DAX and S&P, we will need to see further evidence that the bullish trend is over on the charts.
Correction risks linger…just don’t pre-empt it
Following the big rally over the past 5 months or so, the risks of a correction are high, especially when you consider for example that US oil prices are at $85 per barrel and governments are facing rising cost of servicing their debt as yields climb, making it increasingly difficult to continue borrowing without raising the debt-to-GDP ratios to alarming levels. So far in 2024, these worries and concerns about over-stretched valuations have been shrugged off by investors. Let’s see if that changes as we head deeper into Q2 and 2024.
But the big rally in gold despite rising bond yields suggests some investors are getting worried about the alarming rise in US debt levels. At some point, governments will need to reduce deficits in order to stay on a fiscally sustainable path, something which has not been addressed by success governments.
That said, bearish speculators still need to see a confirmed reversal signal of the charts given the strength of the rally in the last couple of quarters. Once the charts start breaking key support levels and start respecting resistance levels, that’s when it might be wise to adopt a bearish approach to the markets.
What to expect for remainder of this week?
Looking ahead of the rest of the week, we have about 5 Federal Reserve speeches scheduled for today, although the main focus on the US economic calendar will be on Friday when the March non-farm payrolls figures are released. I guess for stock market bulls, any signs of a soft landing would be welcome as that will keep the prospects of a rate cut in June alive. The bears will want to see further evidence of sticky inflation in the upcoming jobs report, and CPI next week. The headline nonfarm payrolls figure is expected to come in at 212K vs. 275K last time, while the unemployment rate is seen steady at 3.9%. Average hourly earnings are expected to have risen by 0.3% month-over-month in March.
DAX technical analysis: Key levels to watch
Among the more technically friendly indices to watch is the German DAX index.
The DAX sold off on Tuesday to break its short-term bullish trend line that had been in place since mid-February. The index had hit a fresh record high just the day before. So, despite that drop, more evidence is needed to suggest the market has topped.
Indeed, on Wednesday, the German index formed a small hammer candle to suggest the bullish trend may be about to resume. But let’s see if there will be any upside follow-through now that we are trading around the high of Wednesday at 18,380. A failure to hold this level could pave the way for a fresh drop to take out liquidity resting below this week’s low at 18,239.
Key support below this week’s low comes in around the 18,000 level. This psychologically-important level also converges with a bullish trend line and the base of the mid-March breakout zone.
On the upside, Monday’s low at 18461 is a potential resistance level to watch, although if the sellers do not show up there then that could pave the way for a run to a new all-time high above 18635. There’s no doubt though that the index remains near extreme overbought levels, as evidenced by the Relative Strength Index (RSI) in the sub-chart, moving above 80 earlier this week. At the time of writing, the RSI was still holding around the 70.0 threshold, suggesting that more time (i.e., consolidation) or downward price action was needed to work off those overbought conditions.
Trader | Analyst | TradingCandles.com
e: Fawad.Razaqzada@TradingCandles.com
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