For the first time since before the US debt-ratings downgrade, market volatility returned to the average level of pre-GFC volatility. The ASX 200 posted another gain of just over one per cent for the week following a string of weekly gains for the year – totalling 5.7 per cent for the year-to-date.
Fear – or irrational volatility – stayed within the tramlines and finished the week right in the middle of the normal zone making the current run of 'normal' fear two months long. This result is a very encouraging sign of how the market may deal with future adverse shocks.
Disorder – a measure of the lack of similarity in returns across sectors of the market – remained at low levels and finished the week just below the lower tramline. Controlled fear and disorder are, in our opinion, necessary conditions for a market to sustain a rally.
Our forecast for the next 12 months remained at just under 13 per cent. Given reporting season starts in a week or two, this is yet another encouraging result.
The week closed with exuberance just over fair price at +0.3 per cent – for the first time since early April 2011. While underpricing has been eroded by the January rally, the combination of volatility, fear and disorder makes current market conditions by far the best since before the August – November chaos. The market is about 500 points below when the market was last at fair pricing. This situation has arisen because the fundamental level was eroded during the latter half of 2011. With capital gains forecasts strong at 13 per cent, the fundamentals are in a position to rise again with the market if it continues to rally.
Only IT, Health and Staples seem to be cheap. Telco is expensive and the rest are in a range of ±2 per cent. More detail is contained in our companion weekly publication Woodhall's ASX 200 Exuberance Stats.
The US market is a little overpriced so its soft finish to the week was a relief. US GDP at 2.8 per cent was a little below expectations. The fall in yields for European debt is most encouraging. 2012 is shaping up to be the best in a while.
All data are sourced from Thomson Reuters Datastream.
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