Is this bull run too good to be true?

Founder and Publisher of the Switzer Report
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January has a historical inclination to be positive, while February is often the consolidation or profit-taking month, but this year the positivity on stock markets continues. Can we trust this bull run that picked up pace around Christmas, but started in October?

Over the weekend, the pace picked up again following a better-than-expected US jobs report. Unemployment fell from 8.5% to 8.3% in January, and 243,000 jobs were created, which is a lot more than the 150,000 economists expected. There was also better news for factory orders and the services sector grew faster than tipped based on the Institute of Supply Management’s survey of the services sector.

The end result was that the Dow Jones was up 156.82 points, or 1.23%, to 12,862.23 and it is now up 5.28% for the year. The S&P 500 was up 19.36 points, or 1.46%, to 1,344.9 to be up 6.94% for the year.

The Nasdaq is up 11.54% for 2012 and the broadest US stock market index – the Russell 2000 – is up a whopping 12.17%! Meanwhile the VIX, or fear index, which measures investor-apprehension is down to around 17. The VIX was pushing 40 late last year and was around 80 when Lehman Brothers failed!

Profit-taking is due

I’m not sure how long all of this will last, but eventually profit-taking will happen. Even so, I suspect we’re in for a better 2012 compared to 2011. And I also know that if the Europeans impress us with their work over the next couple of months, we could see the big rebound that bears have predicting when the worst is behind us. Geoff Wilson of Wilson Asset Management, who has been bearish for some time, has always said that when the bad news is over, “there will be a big bounce”.

This is why my eyes were grabbed by a headline saying that Mark Mobius was a euro bull!

Mark Mobius, the executive chairman of Templeton Emerging Markets Group, told CNBC that the euro would survive and he was investing in Europe on the basis that there is progress.

“Reforms are taking place now in Europe, the effects will kick in next year, and then you’re going to see a much stronger regional community,” he said.

He also predicted that both Chinese and Middle Eastern investment would pick up cheap European companies and brand names, helping the recovery.

This comes when stocks in Europe last week hit a six-month high and it also comes amid expectations that crucial European Union (EU) negotiations over fiscal restraint will be signed in early March.

And it also coincides with another round of funding for banks and if the news from the EU is good, it will help lower global interest rates for banks and the positive knock-on effects for both global economies and stock markets would be hugely positive.

High Aussie dollar a problem

Right now, our market is up 10%, but I reckon it will be up further by the end of today. We have remained pretty cautious compared to the US and so we have the potential to play some catch up on other markets, but that high Aussie dollar is no help. The irony is that as the outlook for the overseas economy picks up, our dollar historically goes with it and not until the Yanks raise interest rates will we see the greenback take some ground off the Aussie, unless some international economic or market disaster raises its ugly head.

I can see profit taking ahead, but I can’t see a disastrous sell-off in my near-term crystal ball. Having said that, we do live in challenging times and I’m really glad I’m a long-term investor in good quality companies that pay nice dividends.

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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