Rudi On Thursday

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

It is without one grain of doubt the most asked question among investors these days: is this the start of a new positive era for global equities?

While questions may vary in wordings and terminology, maybe even in terms of timing and timeframes, there is little doubt that if we had an accurate question-o-meter that could measure at any given time the most asked question across the globe, this week’s number one would no longer be “what’s the meaning of life” or “is there life after death” – it would now be “is the recovery in share markets for real”?

To the frustration of many an investor, the expert community is still populated by many who remain convinced the answer to the question is negative, and they have about a million factors to support their argument and to convince you too that what we are experiencing is a fata-morgana, a castle in the air built on hope and silly illusions, but nothing more.

There are others though, with a more optimistic view, and even though it is difficult to gauge who’s actually outnumbering who at the moment (media coverage is not necessarily accurate in this respect), we at FNArena believe there is definitely a trend towards increased optimism. We see more signs and signals of this shift every day. It is clear the number of experts switching to a more positive view, even if this simply means turning less bearish, is a new trend happening.

Maybe, I thought earlier today, maybe there’s an analogy here with the global community of economists last year that could provide investors with some useful insights. For those who have already forgotten about it: as prospects for the US, and the global economy, started worsening throughout 2007 a vast majority of economists staunchly refused to contemplate anything else than that global economic growth would remain robust. However, what started off as a small minority grew bigger and bigger as the year progressed and sometime in the first quarter of this year it seemed the number of economists who had become convinced the world’s economic prospects had turned for the worse finally represented a clear majority. By then, of course, financial markets had already started to prepare for the worst, many a commentator exclaimed the US was or would be soon in recession and shortly after economic data were signaling dire times lay ahead for many a consumer/home owner in the US.

If we take last year’s economists as an example, then maybe it is not so important that the bears are likely still in majority among the share market experts across the globe; maybe it’s better to focus on the fact that the positive camp is growing every day? Maybe by the time the majority agrees we’re well on our way into a new bull market we will already have long passed the early stages of the share market recovery?

It won’t be a straight line up, though. It never is.

Right now, however, it feels like the market is looking for a second wind. My gutfeel tells me that without the Westpac((WBC))/St George Bank ((SGB)) merger, and without renewed speculation regarding an increased bid from BHP Billiton ((BHP)) for Rio Tinto ((RIO)) and possibly some Chinese interference, we would have seen a retreat instead of further advances this week.

I have already pointed out over the past weeks that more and more stocks are pushing past or against average price targets; banks and resources companies in particular. This reeks of a pause, to say the least.

One of the first market experts (if not THE first) to put his reputation on the line and announce the end of the bear market in late March/early April, Dennis Gartman, revealed yesterday his gut was telling him similar things (as mine). Gartman turned to his technical charts and immediately spotted what the story was: all major US share market indices are pushing against their 200 moving averages (from underneath). This now means that if share markets cannot continue their upward path in the next trading sessions, and move confidently above these averages, they are likely to be “knocked back” and retreat instead. That’s what it says in all the technical trading text books.

Gartman sticks by it. What we need, says Gartman, to continue this recovery is a strong close for the DJIA above the 13,000 level. The Nasdaq has to surge beyond 2520 and the S&P500 index needs to move to the upper side of 1430.

Even if it turns out this recovery is taking a holiday for a while, this doesn’t necessarily mean the global share market recovery stops here and now. Gartman didn’t put his reputation on the line for seven weeks of upside only. And if the trend I described earlier is anything to go by, than surely as night follows day, and day follows night, the next pause will simply provide investors with a better entry point than today or yesterday.

Market strategists at GaveKal couldn’t agree more. They have been on the more positive side of the market in recent weeks and their positive sentiment has only grown further. Today GaveKal (similar to other market commentators) draws support from the fact that retail sales in the US simply refuse to fall off a cliff.
So far this month, GaveKal reports, its own overview of major economic data shows “US numbers have surprised on the upside ten times, versus three disappointments”. The key message from all this, says GaveKal, is that while the US is “most definitely in a mid-cycle slowdown, we may yet avoid a recession”. In other words: it could have been much, much worse. This is seen as a good signal to buy shares, especially US technology stocks.

Overall, say GaveKal strategists, there are three key factors that fuel their overall optimism: 1) a stronger than expected US economy, 2) a comeback in the appetite for risk, and 3) normalizing commodity markets.

The latter factor in essence means GaveKal anticipates prices for oil, copper and key agricultural products will come down and thus act as less a threat to factors number one and two.

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Time for a follow up on last week’s special announcement: after my official debut on Australian television last Saturday, colleague Greg will now join two other journalists for an hour of Business Views on Sky Business this Saturday from 9-10am.

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Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always firmly supported by Greg, Chris, Paula, Joyce, Grahame, George and Sarah)

P.S. Gartman’s latest daily newsletter just arrived in our inbox: he has decided not to take any risks and has sold his position in the US share market preferring to watch and observe further developments from the sidelines instead. He made a profit on the transaction.

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