Correction phase continues
Chart of the Week 05 Feb, 2010
U.S. equity markets took another hit overnight – this time on the back of weaker than expected unemployment data, as well as growing sovereign debt concerns in Eurozone countries such as Greece. According to advance figures released by the United States Department of Labor, in the week ending 30 January seasonally adjusted initial claims were 480,000. This represents an increase of 8,000 from the previous week’s revised figure of 472,000. The 4-week moving average is now 468,750, an increase of 11,750 from the previous week’s revised average of 457,000.
The poor figures follow a relatively disappointing result for non-manufacturing sector in the Commerce Department’s release of survey data earlier this week. While the overall index for January at 50.5 points was above the critical 50 point level that indicates growth, it was lower than expected. Additionally, the employment index stood at 44.6 – remaining entrenched in negative territory.
Employment data is traditionally a lag indicator, but certainly has the market’s attention at the moment. The correction on the U.S. and Australian stock markets is outlined in the following chart:
Data sourced from Bloomberg
The pressing question is – where to from here? Our technical analyst, Regina Meani, is of the view that, for the All Ordinaries Index, there are strong similarities to the corrective phase experienced in the middle 1970s. The correction which commenced in June 1976 saw the index lose 17.5% before the market turned around and resumed the longer-term upward path in the June quarter of 1977, with lows reached in September 1976.
Source: SR
It is important to note that the action back in the 1970s can only be used as a guide as global technology has made the world smaller in time and space, contracting market forces and increasing volatility. So far the market has corrected more than 10%, breaking important support around 4600. The index is now testing its next shelf of support located between 4500 and 4575, but until there is evidence for a reversal the risk would remain high that the correction may take the index lower towards 4350.
A similar magnitude correction to the 1970s would equate to a drop towards a longer-term support alignment around 4200.
