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Money in the wings

Peter Switzer
2 July 2009

Given our big fall yesterday where the S&P/ASX 200 shed 80.90 points to finish at 3874, today’s stock market movements should be interesting following a rise on Wall Street. Of course, this followed a biggish fall on the New York Stock Exchange. It is the ‘follow the leader’ syndrome but there is more in it than just presuming our minnow market blindly tracks the Yanks.

Biding time
I made the point on my Sky News Business Channel program last night that there’s a lot of money on the sidelines champing at the bit to get into the stock market again. Those sitting on piles of cash are not only rich investors who sold out of shares over 2008 and now see interest rates so low that stocks are starting to look attractive, but they’re also super and investment funds.

Many of these people would like to avoid a 10 per cent pullback on shares so their short-term results can look respectable, but deep down many fund managers would be agonising over the belief that the share prices we see now will probably look like great value in 12 months time when their annual results will be published.

That’s why these smarties would be buyers when the market dips. Consider a share such as ANZ with a share price of $16 and it drops 50 cents in one day, or three per cent, and you buy it and it comes back up in a week giving you three per cent return that annualises at 150 per cent.

All of the great Aussie companies that blue chip investors and fund managers want will be targeted when the market drops and this is stopping a major pullback of shares happening.

A day to remember

The bears need some really bad news and maybe the next US company reporting season might bring a market breaker. The big date for the investor diary is July 17 when GE reports. This is a great bellwether stock for the US economy.

Meanwhile the run of economic data will confirm or deny whether the US recovery happens in the second half and how strong it might be.

Ups and downs

Overnight these were the latest important economic readings:

  • The Institute for Supply Management’s manufacturing index rose to 44.8 in June from 42.8 in May but was just short of expectations. However this very important economic indicator has risen six months in a row and this is the longest positive run since the 2001 recession. And importantly, it’s the highest reading since August 2008.
  • The Pending Home Sales Index went up 0.1 per cent in May, which beat estimates. With four months of rises on a trot, this is the longest monthly run upwards since 2004.
  • On the negative side, construction spending fell by 0.9 per cent in May. There now has only been one up month out of the past six.
  • Meanwhile jobs numbers aren’t great but these are notorious for lagging what is happening in the real economy.

Bears remain for now

On my show last night one of my guests, Lance Lai from ACE Capital, said the bear market is not over until the 200-day moving average is crossed a number of times. So far, it has only happened three times. He thinks a major problem could spook markets and send us below the March lows on the stock market. He brought a bell on the program but refused to ring it.

Ring the bell

Another guest, Ron Bewley, who is chief investment officer of private client services at the Commonwealth Bank of Australia, has created Australia’s own volatility or fear index which he says is back to levels we are used to when markets are not panicking and captured by the bears.

He rang the bell at the end of the bear market around March on my television program and rang it again for good measure.

He says the markets look poised to rise over the next year and a half, and a history of market bounces after a bear market supports his case. However, history does not always follow an expected script.

Bewley says he’s using margin loans for his own investments now, but he reminded me his profile is high-risk and growth-oriented. I can’t see careful investor types following his lead. 

For advice you can trust contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


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