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Why I don’t trust this rally in the equity market

In his column on equity markets, Ateev Dang provides a commentary on recent market developments in Australia and around the globe.

Ateev Dang by Ateev Dang
May 30, 2022
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Why I don’t trust this rally in the equity market
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The stock markets rallied most of last week despite the economic conditions not improving anywhere as investors weighed the possibility of a slowdown in policy tightening by the US Federal Reserve. 

According to Steven Ricchiuto, US chief economist at Mizuho Securities, “Stock investors are under the illusion that the Fed will rescue the market from further decline by easing monetary policy.

Blackrock Investment Institute also cut its rating for developed market equities to ‘neutral’ from ‘overweight’, citing the Fed’s overzealous efforts to curb inflation and signs of an economic slowdown in China.  

The fact that the investors are celebrating sluggish growth environments illustrates the short-term mentality driving markets closer to a day of reckoning.

Technically speaking, the equities market, however, remains in bearish mode. The S&P/ASX 200 index is in a well-defined downtrend, highlighted by lower highs and lower lows. In our opinion that alone is reason enough for maintaining a core bearish position.

WhatsApp Image 2022 05 30 at 12.04.57 PM
Image: Trading View

The Australian market found support near the 6950 area because the market seems to be oversold enough to bounce every time it gets down there. 

Oversold rallies in a bear market are generally ferocious and have the appearance that the bottom is in. It is easy to look at the rallies like that on Friday, May 27, with a sigh of relief. Often traders get excited when the index comes close to the support levels they have been watching and then turns higher. At this point, things start to look a bit better but the probability that these rallies fail is high. Failed rallies are fairly common in the course of a bear market, however, despite the signs, the bottom is not usually in until the downtrend turns into an uptrend. And then we can’t buy bottoms. Remember, bottoms don’t happen in an uptrend.

Breaking down the market to stocks only measure, we can see that the new 52 week lows continue to dominate the new 52 week highs. And even though the new 52 week highs are minuscule, it is dominated by energy and commodity-related stocks, whereas non-commodity-related stocks are getting beaten up.

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Oil prices rose sharply last week even though some experts thought that the rally was running out of steam. One reason oil rallied was that the US Dollar weakened. With inflation continuing to run high and oil prices jumping back to a 2-month high and gas prices at record highs all ahead of another big interest rate decision by the RBA next week we believe that the reprieve we are seeing in the equity markets is in our opinion very short-term.

The one thing that the high yield investors should be scared about more than anything should be the defaults and the default cycle that has been delayed by low-interest rates.

The low-interest rates usually allow companies to stay out of bankruptcy longer than they should. With inflation running rampant the central bank is forced to raise interest rates. As such, the Australian companies being more leveraged than a decade ago and having their earnings weakened by the global pandemic we expect they will have a hard time paying back all the money they have borrowed over the last decade. This is one of the reasons why we expect the current market rally in Australia to end soon.

The short term buying spree in the Australian equity market is also triggered by fund managers being forced to rebalance their portfolios to bring their asset allocations back into alignment, meaning they are compulsory buying into some downbeat names, especially in the technology sector.

For traders who have been buying in this market taking this as a new bull run and potential opportunity for gains, we would like to suggest locking in their profits before the market resumes its long term bearish downtrend.

Disclaimer: 
The writer’s opinions in the above article are his own and do not constitute any financial advice whatsoever. Nothing published by The NRI Affairs constitutes an investment recommendation, nor should any data or content publication be relied upon for investment activities.We strongly recommend that you perform your independent research and/or speak with a financial advisor or qualified investment professional before making any financial decisions.

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Ateev Dang

Ateev Dang

Ateev Dang is a trader and trading coach by profession. He runs his own business called Glow Trades where he coaches interested folks in starting their trading journey. He can be contacted at adang@glowtrades.com.au. Views are personal.

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