FYI | Oct 15 2015
By Peter Switzer, Switzer Super Report
After plumbing the depths of the S&P/ASX 200 index after Glencore Tuesday, when we hit 4928, we’ve seen our stock market, in company with its global buddies, turn around, to have five straight days of rises during which we added a total 4.5%!
A matter of trust
But we are now faced with the $64,000 question — can we trust this recent rally? So, let me present what I know to help you work out your strategy for the rest of the year and beyond.
The best news I received last week was that the Citigroup team think we can see, wait for it, 6200 by the end of 2016! They think the recent sell off is a typical and undoubtedly overdue correction but we seem set to enter the maturing phase of a bull market. They rule out recession talk but they do expect the Reserve Bank to cut interest rates in November — Cup Day, which has been the scene of many interest rate changes in the past.
At this stage, let me remind you what Sir John Templeton taught us: ““Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.” Yeah, I know I have run with this story before but it’s worth repeating, in case you want to doubt me. On Templeton’s historically driven advice, we have two more phases to go — the optimistic maturity stage, which is only in the beginning if the Citi guys are right, and then there has to be the death phase, built on irrational euphoria.
Confidence and shares
The next good piece of news came from my old mate AMP Capital’s Shane Oliver, who pointed out that investor confidence surveys are historically very low!
This is what he thinks lies ahead and explains why negative sentiment is a good thing.
“A further leg down in shares remains a risk in the weeks ahead. However, along with the more positive seasonal pattern in the months ahead, there are fundamental reasons to see a resumption of the cyclical bull market,” he observed last week.
He argued that:
- Shares have become cheaper as a result of their falls;
- Global monetary conditions remain very easy and in some cases, are getting easier (with easing in China, Taiwan, Norway and India recently, the ECB threatening more easing and the Fed delaying tightening); ?
- This in turn should help ensure that the global recovery continues, albeit at a sub-par and uneven pace; and
- Investor sentiment is very negative, in fact falling to levels associated with share market bottoms, which is positive from a contrarian perspective.
(Gee, I hope the Citi guys are right! They seem to be on a unity ticket with yours truly).
Shane’s reference to seasonal patterns implies what I often talk about – the so-called Santa Claus rally. That’s another reason why I think the remaining months ahead could be good for stock players, even though another sell off is very possible.
That said, I suspect we might have seen the worst of the stock dumpings, provided nothing really worrying from left field emerges in coming months.
Another positive sign from last week was the view from the investment team of Australian Foundation Investment Company (or AFIC), who told the media that it thought the market had bottomed. Of course they could be wrong, but they don’t make these calls without some compelling evidence given the huge amount of money it invests.
.The negative view
Against this, those cursed short-sellers/hedge fund managers have taken out short positions, which the AFR says are at historically high levels.
Short positions, as of Friday, totalled 5.8 billion shares, which implies the smarties are not convinced that the “fat person” has sung to let us know that this correction phase is altogether over.
In contrast to Citigroup’s view, the likes of Morgan Stanley have the S&P/ASX 200 index by the end of 2016 at, wait for it, 5150, so they’re certainly not expecting Santa Claus showing up for a couple of years!
At the end of the day, what you think about the future course of stocks depends on what your economic forecasts are for China, the US, our economy and the global big picture.
Here we have some contradictions and the International Monetary Fund is no help. Last week, it said they expect our global economy to expand by 3.6% in 2016. I was excited about this optimistic forecast, because that would be the fastest growth in five years! Unfortunately, the global forecast for this year was downgraded from 3.3% to 3.1% but it gets worse.
This story appeared in the Daily Telegraph in the UK, which alarmingly revealed that the “fund said global growth this year would be the slowest since the Great Recession. A separate report by the fund warned that the world faced a “triad” of challenges that meant policy missteps could wipe a massive 3% off global growth!”
The report cited corporate default by emerging economy companies, when the US raises interest rates, as a possible trigger for a new credit crunch, like the one in the 2008 GFC. And then you can throw in the China slowdown, which already has a lot of people worried.
Now this is a speculative report but, of course, media outlets seized upon it because it sells newspapers and attracts eyeballs on the Internet, but it is a lower risk expectation.
This was not their preferred view, just a possible outcome but it’s why there are short sellers and those not entirely agreeing with the likes of Citigroup, Shane Oliver and others who believe the economic equation will be stronger in 2016, not weaker.
I might not trust this rally as being set to go higher in coming weeks but I can’t see anything looming that will force our stock market down too low. I can see reasons why stocks could trend higher into early 2016 and especially so if the Fed delays the first rate rise until next year, and we get some positive news out of China.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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