Hand in the Pocket

May 2023 seemed to have been a month of low volume, with market participants' hands in the pocket. Understandably, as investors were awaiting the outcome of two key issues, still hanging in the air in May. The first was the the US debt limit crisis. This is the risk of the US government potentially going into default should its maximum debt limit not be increased by Congress. This came through positively on June 2nd. The second was Australia's next rate move by the RBA. This came in negatively as Australia had its 12th interest rate increase by 25bp bringing cash rate to 4.1% (some 4% higher from just a year ago).

These two factors brought the wait and see market in May down some 3% on the S&P/ASX200. Trading volume though was not low as it was some 20% higher than April when the Index hit a recent high of around 7300 (when it was up 1.8% for the month). See Chart 1.

Chart 1: May23 Trading Volume

For the month of June so far, markets have been trending more positively than May. There are some gaps in certain sectors that are of great interest to us.

The very ignored banks and resource stocks to the rise of tech stocks. See Chart 2.

Chart 2: Nasdaq vs. Banks May23

The gap between resource stocks and the banks in Australia. See Chart 3. The 12th increase of interest rate had definitely weakened bank shares. At the current juncture, the key consideration is if they are low enough for re-entry or weighting increase.

Chart 3: Resources vs. Banks May23

Another interesting development is in the rise of the top 50 (or may be just the top 5) stocks on the S&P500). Should this positive trend prolong, it is possible that we shall see the rally extending to the next tiers.

This is what US options trades are telling us - it is now costing 3 times more to buy options on small cap stocks. See Chart 4.

Chart 4: Rusell 2000 options

This trend is definitely not dissimilar in Australia as depicted by the gap between the performances of large vs. small cap stocks. Will we see Ausrtalian small caps follow US market's Russell 2000 (small cap index) lead? See Chart 5.

Chart 5: Australian Small vs. Large caps

As financial year approaches, trading activities are likely to pick up. Candidates that my be going to the tip this year for tax loss selling* are the small techs (those languishing with no hope of benefiting from the potential small cap recovery).

*tax loss selling is an activity carried on by some investors and institutions crystallising losses to offset realised gains during the financial year.