Global Markets Overview – October 14, 2014

The only way is up (for the VIX)

A lack of macro news overnight meant markets were left to their own devices, which led to all sorts of indictors and moving averages being triggered.

The S&P crossed its 200-day moving average for the first time in 471 sessions - a record. It has now lost 4.6% in three days, its worst slide since the highly volatile days of mid-2011. Futures markets are down 7.4% - well clear of the of the 5% pullback mark.

The November 2012 uptrend is now clearly broken. The shorter-term 21-day moving average has crossed the 55-day, which can also be seen in the weakness in the oscillators. Interestingly, the index is not oversold yet either. Technically, there is little reason to be long. If one were to hold a bias, it would be to short, based on the technical view. The US earning season starts in full tonight. Fundamentals may come into play, considering how pessimistic earnings estimates are.

All these triggers have seen the US VIX index rise to its highest level in over two years at 24.2 on the spot rate, with October contracts at 22.7 (+40% in 14 days). There is only one direction for the VIX to go over the coming few months, and that is up. The volatility depressor that has been the asset purchase programme is now 15 days away from being unwound. The market's reaction clearly shows there will be teething issues once it is left to its own devices.

The movement in the oil price is also an interesting development, as it fell to a four-year low on 'increased supply'. The world has not seen a significant decrease in the demand for oil or energy and there isn't a massive oversupply. The issues in the Middle East are still a real concern. The current conflicts in Syria and Iraq need to be considered a real risk to energy - the current falls have a very strong floor.

What we also see as interesting on the back of the slide in oil is the slide in names like Santos and Woodside, which are now two-standard deviations away from their 20-day moving averages and have RSIs well below 20. These two significantly oversold stocks should have strong upside on any change in market sentiment.

Ahead of the Australian open

The talk today in Asia will be centred on what happened in the iron ore market yesterday. Iron ore futures in Shanghai limited up on the open and all attention flicked straight to the 6%-plus move in FMG. The spike can be explained by a mass short covering, considering FMG is in the top three of the most shorted stocks on the ASX. However, there is an expectation that there might be a big kick in the spot price.

The reason for this kick are the rumours coming off The Street that several Chinese iron ore mines have not reopened following the Golden Week Chinese national holidays. This will see the oversupply easing and price rises if confirmed. Overnight, spot iron ore jumped 4% to US$83.10 a tonne.

Despite some signs of upside in materials, we're calling the ASX 200 down 43 points or 0.82% to 5112. This is two points away from a technical correction - 5110 is exactly 10% from the August high of 5679. The last time the ASX saw a technical correction was May-to-June last year, when the market fell 11.4% from the intraday top to the support level. The question is whether the market will repeat the same pattern. We shall see.

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