Rudi On Thursday

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Bear markets. It’s an acquired taste, but once you figure them out it’s not difficult to imagine you might ultimately fall in love with them, and develop an addiction.

It’s those sharp rallies -sharper than any bull market at any time- and as we’ve all been able to witness since November last year: there are plenty of them. So, as long as we manage to steer clear from those “fall-of-a-cliff” corrections, this could ultimately end up generating lots of fun, plus profits.

If we take yesterday’s intraday low point as point of reference, the Australian share market has now rallied more than 4% in (strictly taken) less than two trading sessions. And that doesn’t take into account that many individual stocks, blue chips and large caps included, have gained much more than that.

Observation number one I made today is that nearly everything rose, even including some oil related stocks. This should make one suspicious.

Second observation is that, if we forget about the meetings by central banks in Australia and the US for a minute, this rally came to life as the S&P/ASX200 index found solid support at 4758; the same level that proved equally impenetrable in mid-June. Technical chartists will tell you this level is important as it marks the 50% pullback from last year’s bull market peaks. If this level would give in we would instantly be looking at the 61.8% level, which is a lot lower than where we are today.

Of course, 4% in two trading sessions (or less) doesn’t signal the end of the bear market. Some chartists have been quick to point out the danger for more losses, and lower lows for indices, is still very much present, embedded and tangible. I saw one on financial television today, explaining his long term charts showed a so-called head and shoulders formation. Without going into too much detail (I suggest those who are not familiar with these technical formations do some homework) he was saying, in essence, that we have just completed the left hand shoulder (if the head is staring at us) and this would suggest that any drop below the levels we took off from yesterday would be significant. He was talking 3500 as the next target for the ASX200 index. If. Not, when.

On the other hand, the TechWizard reported this morning that if the Australian share market did not put in a decent rally today, and that looked far from certain before the opening bell as resources stocks looked wobbly in overseas markets, this would be yet another bearish signal, as various other indicators had already turned bearish (or threatened to).

The Wizard is likely to stick to his bearish bias regardless, as he believes banks are still to come one more wave down, at least. As technical support levels are being broken by about every commodity that trades somewhere on a public exchange, this should not exactly support the share prices of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Incitec Pivot ((IPL)).

From a fundamental perspective, and as indicated in my two last Weekly Insights (available on the website if you missed them), I believe we are currently witnessing the transformation from the initial phase of the bear market, when bad news is bad, to the next phase, where more bad news actually starts translating into positive consequences. To put it simple: bad news is no longer necessarily bad; from now on it can actually be a positive thing.

Examples: let’s hope consumer confidence, retail sales and overall lending in Australia remain at low levels as this is likely to convince decision makers at the RBA that official rates need to come down sooner rather than later. Equally, it would not be such a bad thing for prices of commodities to come off some more, oil in particular, as this will help bring down inflation globally and thus central banks across the globe don’t need to consider tightening monetary conditions. And let’s hope banks in the US and Europe throw some more kitchen sinks out of their glass buildings, as this ultimately brings closer the point where the majority of write-offs, and write-downs, and provisions, and equity raisings have finally finished.

As such, I believe the underlying dynamics behind the share market are improving. But investors better not take this in the wrong way: there will be plenty of bad news to come in the months ahead. As bad news will compete with positive news for the upper hand, investors should be prepared to dance “two steps forward, and two steps back” (as my favourite Australian band Whiskey Go Go’s puts it) and at times this will still become two steps forward and three back (until we’re only taking one step back). A recovery from the problems the world economy is currently battling with doesn’t develop overnight. It really is that simple.

At the moment, economies in the US, the UK, Canada, Spain, Ireland, Italy, the Baltic states and New Zealand are in or near an economic recession. Whether Japan will join this group remains a matter of public debate (but I spotted some significant reductions in growth forecasts this week). Indications are Germany and France are probably moving towards joining this group.

Regardless of what happens in China, India, Russia, Brazil and the rest of Asia, the countries mentioned above represent more than 60% of global economic growth, I’d estimate. Does this tell you enough about why commodity prices have been coming off since last month and why they have been breaching technical support levels over the past two weeks?

I won’t even mention a resurgent US dollar and the fact that large fund managers already started exiting the sector many weeks ago. (Oops, I think I just did).

Amidst all of the above, I believe that many investors have been, and will continue to be, misguided by the Stronger For Longer mantra that is being promoted by about every stockbroker in town. (It’s very difficult to turn on my TV these days and not hear the same sales pitch).

The Stronger For Longer concept that I subscribe to means prices for most commodities will remain higher than where they have been throughout the nineties. But they will still be lower than where they were not that long ago. And that is the reason why the share prices of many mining companies are hitting twelve month lows these days.

Stronger for longer? Is this whole idea of a Super Cycle hasn’t already translated into Super Losses (For Longer) for many an investor who took the concept a little too literally over the past year?

Tread carefully.

I note that this week’s fierce bounce for banking stocks has now again pushed shares of Commonwealth Bank ((CBA)) at par with the average price target for the stock. This has never been a good sign over the past years, not even when it happened during a bull market. This does not mean the share market will 100% guaranteed pull back tomorrow. But so far, it has almost always indicated that investors are once again running ahead of themselves, and of market fundamentals.

(Note CBA reports its full year figures next week. What are the chances this will lead to higher price targets?)

Ignore at your own peril. Including all the prior paragraphs.

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Time for a special mention:

This week we welcome Andrew Nelson, previously the editor of online financial news website egoli, as a new member of the team here at FNArena.

I am sure those readers who have been visiting the egoli website over the past 4.5 years will agree that Andrew has done a mighty fine job over there.

We are very pleased Andrew has now joined our team and I personally have little doubt his contribution to our service will ultimately be as valuable as it has been for egoli, if not more.

We’ve got plans here at FNArena and we think Andrew fits in perfectly. Watch this space.

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With these thoughts I leave you all this week. Till next week!

Your editor,

Rudi Filapek-Vandyck
(from now on firmly supported by Andrew, Greg, Chris, Sarah, Joyce, Todd, Grahame, Pat, Paula and George)

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