It’s time to be scared

Founder and Publisher of the Switzer Report
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It has been a great quarter for shares with the Yanks’ stock market up around 12% and the local S&P/ASX200 index up around 7%. These are annualised gains of 48% and 28% respectively, so we know there has to be some selling sometime this year and April and May often usher in such a period.

And with some softening of US economic data and more European debt concerns emerging, the question is: is it time to be scared?

Peppering my fears is another market cliché that ‘markets go up by stairs, but come down in elevators’. We saw this last August through to September and we have been climbing the stock stairway since October.

Up the stairs

It was good to see the market influencers for our stock market – the Dow and the S&P 500 index – up 0.5% and 0.37% respectively for the last day of the quarter. Also the VIX, or fear index, in the USA is at a low 15.5 reading, which means Americans are a lot less worried about stocks than four months ago.

There has been a great run for a half-year, but doesn’t that set us up for fall? And the logical answer has to be ‘yes’, but does it have to be steep? Couldn’t we get a retracement without a 10% correction or a 20% crash?

In a nutshell, the calibre of the economic data, company earnings and the debt developments in Europe will determine the story. My feeling is we will see some sell-offs which could get close to a correction, but I will use these opportunities to buy on these dips.

I think the past six months of solid stock price rises is saying that the Armageddon scenario has become less likely and we can thank the European Central Bank for throwing a trillion euro at eurozone banks – lending it to them at 1% for three years!

Three tigers

It now becomes a waiting game and over the weekend three ‘tigers’ might have ridden to our rescue, but I do say ‘might’.

First that great tiger – China – surprised economists with the official PMI, which tracks manufacturing in that country, coming in better than expected. The reading came in at 53.1 and this up from 51 in February (readings above 50 indicate expansion).

On the other hand, the HSBC reading for the same time was only 48.3 but the experts say this is more influenced by private manufacturers while the former has a greater official factory influence.

Whatever, this temporarily will take away fears of a hard landing for China and will underpin stock prices and help control the overdue sell-offs ahead.

More good news came from the once tigerish US shopper with consumer spending putting on the best gains in seven months and consumer sentiment hitting the highest reading for a year.

Finally, Tiger Woods won the Arnold Palmer Invitational Tournament – his first in years – and this, some optimists argue, is a good omen!

A strange correlation

The New York Times featured a John Raoux/Associated Press article, which talked about Tiger’s bad patch, which was similar to the market’s struggles, “but in March, after more than 900 often harrowing days, both Tiger and the market accomplished something memorable.”

So Tiger is winning again and the S&P 500 is over 1,400 and up 107%-plus since the crash of 2008.

And while there has been an odd, positive correlation between Tiger and the S&P 500, the latter has had difficulties around the 1,400-level, just as our S&P/ASX200 has around 4,300, which currently we are above.

A Morgan Stanley analysis says beware of getting too optimistic from here as the challenges for the US economy and the stock market are still considerable, just like the challenges for Tiger to reproduce his winning ways before a tree and a fire hydrant got in the way of his SUV.

Of course, both market and the master golfer could defy their critics, but you should never get too carried away with one win.

And by the way, the Aussie market is on the improve, but it has to lift its game – a bit like our golfers.

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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