The testing times have arrived

Founder and Publisher of the Switzer Report
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Well, you know I’ve been talking about it for some time but now the real test of the 2012 stock market surge is about to happen. Regular readers know I’m bullish on the overall year, but I expect to see some testing of the market and that testing time is here.

The two main tests

Given the Greek and French election outcomes, the big test is what we do with a Europe that does not want austerity. And the ‘little’ test is how this will threaten the US economic recovery.

Over the weekend, poor jobs numbers in the US took the Dow down 168.32 points or 1.27% to 13,038.27, while the S&P 500 lost 22.47 points or 1.61% to finish at 1,369.10.

Now an already shaky stock market has to cope with the prospect that new governments in France and Greece will want to re-work the austerity promises linked to their big debts and this could unsettle their lenders – European banks. If you throw in the poor employment numbers in the USA and a run of economic data, which I have called “mixed”, then you can see why testing times are ahead. However, it could create the ‘buying the dips’ opportunity I have been talking about.

For the year, the Dow is up 6.72%, the S&P 500 is up 8.87% and the Nasdaq is up a whopping 13.48%, and that’s why it’s time to test the market. The fact all of this is happening in the historically negative month of May adds to the drama that lies ahead.

By the way, Apple’s shares have been pointing to stock market challenges, with the price slumping from a recent high of US$644 to $US565 now. That’s around a 12% decline to be below its 50-day moving average, and this stock has been a big driver of the indexes this year. As I said, testing times are here.

Some good signs

Against this for us Aussie stock players in SMSFs, US company profit reporting has been better than expected, with 67% of companies out of the 415 that have reported in the S&P 500 index beating the Street’s ‘guesstimates’. And Ben Bernanke stands ready to do a third stimulus package if the US economy heads south. Meanwhile, Chinese economic data has been better than expected and the economy represents one of the brighter beacons for bulls right now. This week will be important with key readings from China on inflation, retail and factory output to be released. Let’s hope China remains a plus in a rising tide of negatives.

Locally, we will see Treasurer Wayne Swan reveal his budget strategy for the year, which will not directly help the economy, but if the Reserve Bank of Australia (RBA) keeps cutting interest rates, as I expect, it will lower the dollar and stimulate consumer and business spending. This will help my prediction that Aussie stocks will have a good year in 2012.

Over the weekend I was chatting with David Murray, the former Commonwealth Bank chief executive and former chairman of the Future Fund. He thinks interest rates could come down by another 100 basis points. If that happens (and a lot of it is passed on), this would change the equation for lots of Aussies who have been saving like there’s no tomorrow, which has been hurting the stock market.

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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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