FYI | Apr 05 2012
By Peter Switzer, Switzer Super Report
SELL: Stocks have performed well over the past five months, but as we enter May, should we pay attention to the market cliché to sell in May, or should we stick it out? Here's what I think.
With the end of the quarter concluding a great three months for stocks – the S&P/ASX200 rose 7%, and is up 12% since last October – the next obvious question is: can stocks keep going up and can local stocks catch up on the big gains Wall Street has churned out?
The market started turning down in April last year and behaved psychotically until about October with a real scary session over August and September, but history actually says April is a pretty good month. On the other hand, the month of May is not so merry for stock players, but could this year be different?
Fear is subsiding
The good news helping stocks is the big jump in US stocks and this is coaxing investors out of the cash or fixed-income option. The VIX, or fear index, is down to 14-15 and this is a measure of share players’ skittishness and these readings are good for shares.
Some US investors think the United States has decoupled from Europe, but that could be wishful thinking.
The big test ahead will be the depth of the eurozone recession with this week’s reading of the PMI, or manufacturing activity, not pretty reading. It fell to a three-month low of 47.7 in March from 49.3 the previous month.
However, the Poms did release better-than-expected factory numbers and so did the Yanks, and if we throw in the Chinese PMI figure, the outlook for the global economy looks more positive. However, we have to be mindful that the Europeans remain the biggest threat to a good year for stocks.
That said, I think the effort of the European Central Bank (ECB) to provide €1 trillion to European banks for 1% for three years is a powerful weapon for optimists. In addition, the EU finance minister’s decision to build up the region’s firewall to the size of US$1 trillion is another plus.
This is how the finance ministers summed it up in their official statement: “Finally, robust firewalls have been established…” and that’s why Wall Street shot up last Friday.
Where to for domestic stocks?
On the local front, our stocks are up 12.3% since early October and we shouldn't squeal about this, but we do have a desperately weakened economy outside of the mining and the related construction businesses.
I believe the Reserve Bank of Australia (RBA) will be forced to cut interest rates at least two more times this year and that will help kick up consumer and business confidence and this could offset some expected increases in the Aussie dollar. Lower rates and a more contained dollar in the context of a better-than-expected global economy should help our stocks this year, although a pullback has to happen.
That said, I would tip nothing like we saw in September.
Eye on China
Meanwhile, I like the observations of Jordan Kotick, managing director of technical strategy at Barclays Capital. I have watched this guy for years and he has a great strike rate. He expects a good run for China bulls and the Shanghai Composite Index, which does impact our indexes.
Using Dow Theory analysis for the Shanghai Index and the MSCI China Transport Index, Kotick argues there is a strong buy signal.
Dow Theory says the transportation and industrial averages must go higher together to indicate a sustainable bull market.
“In September of 2011, the transports [in China] made a new low, but it wasn’t until January of this year that the Shanghai made a new low,” Kotick pointed out on CNBC. “So if the Shanghai composite can hold the lows, then what you have is a Dow Theory bull signal for China in the second quarter.”
This is just one reason why I am happy to risk the tricky May-October period this year, but as I’m a long-term investor of good companies, even if I am wrong, I will just buy those companies and bring my average share price for holding these money makers down.
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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