FYI | Oct 15 2010
By Rudi Filapek-Vandyck
I added a rather weird experience on Thursday. Later that day I had an interview scheduled with Gain Capital's technical market strategist Todd Gordon, temporarily travelling through Europe and Australia, but first I had to appear on Sky Business's Lunch Money, only to find out that part of my contribution to the day's program was to live interview… Todd Gordon.
I intend to report with more details and depth on the second interview some time next week, but one take-away conclusion I'd like to share today is that Gordon believes global risk assets are becoming too much of a one way directional trade.
Ultimately, such “easy” and “predictable” moves won't and cannot last forever and it is for this reason that he has been taking some money out this market by phasing out market positions that have served him well. Think going long Aussie dollar against the US dollar, for example.
This, however, doesn't mean investors should not continue trading in line with the current trend, in Gordon's view. In reference to the old market adage that “overbought” doesn't mean the trend cannot continue, Gordon does advocate that investors remain nimble and ready at all times to close positions and get out.
It's very difficult to exactly time when that correction does arrive, but when it does it'll likely cause some fair damage to those unprepared and overexposed. And this market, with low volumes and low volatility, has already become so stretched that one must consider there will be correction at some point, we just don't know where it will start, why, or when.
Against this background, a growing number of experts and market strategists has been advocating investors be careful this week. Whether it be in reference to gold's dizzying heights, or because of the steep advance of the Aussie dollar, or because of internal weaknesses found inside the US share market rally.
Some experts are pointing into the direction of banking stocks, who have been lagging in this rally, as one major factor as to why investors should be cautious. I do not necessarily agree, because there are very good reasons as to why banks, especially in the US, are not keeping up.
But one can only agree with the general warning that things do reek temporarily at least of a little overdose in general market euphoria.
One of the warnings that entered my inbox this week came from technical market analyst Daniel Goulding, publisher of the weekly Sextant Report. Goulding remains bearish on equities longer term, predicting indices will revisit and put to a test the lows seen in March 2009 at some point in the two years ahead of us, but between now and December the end result should be for an ASX200 index close to the peaks witnessed in April, he predicts.
However, and this is where the warning comes in, Goulding also believes market momentum has stretched itself too much in favour of the bulls since August and several indicators, simmering below the surface, are telling him there's probably not much room left to post further advances, not for the immediate term.
Hence why Goulding warns investors should leave their complacency behind and expect something nasty, and soon.
On Goulding's assessment, a pullback could see the ASX200 revisiting 4500 in a hurry, but as said above, after that it should be straight back up and continuation on the market's road back to 5000.
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To top today's theme off, here are the closing paragraphs in a weekly market report by Peter G. Hall, Vice-President and Chief Economist of Export Development Canada:
“We're running out of arguments. What remains is the use of commodities as an investment vehicle, a store of value, an inflation hedge, and so on.
“If this is the case, unless we really are running out of these commodities, they are collectively likely to be as disappointing an investment instrument as they have been in the past, globalisation notwithstanding. These markets always seem to find a way of clearing at less-than-dramatic prices.
“The bottom line? The current runup in oil and base metals prices is an oddity. Market jitters could cause it to persist, but it is perhaps best to add a possible price correction to the growing list of risks that the world economy faces in the coming 12-18-month period.”
