The market game changer is arriving

Founder and Publisher of the Switzer Report
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Our S&P/ASX200 index has rallied 9.7% since 5 June, making “me waters” look like they’re very predictive, provided regular readers can remember my positive Kath & Kim market call on 21 June.

However, I’ve been in this game a long time and know you can be a rooster one day and a feather duster the next, so the question is: what can change that could ruin the rally or, on the other hand, what can pump it up?

This has been the best run for shares for two years and I feel certain that while Wall Street is up on the expectation that the US Federal Reserve will pump up money supply with a third quantitative easing package (QE3), the more important action has to come from the European Central Bank (ECB).

Game changer

In my blog on the Switzer website this morning, I made the point that good US economic news could create bad market news if QE3 is abandoned or delayed. We have been getting some good economic news lately – both US consumer sentiment and leading indicators were better than expected on Friday – mixed up with some bad news, but the good stuff could kill QE3, especially if the housing sector continues to step up. By the way, there’s a lot of housing data this week.

I argued that Wall Street could get over not getting QE3 because the US economy surprises on the high side and, crucially, the ECB and EU leaders really come through with an impressive plan to bring down bond yields for the likes of Spain and Italy.

My conclusion is that this rally could develop into a genuine bull market, killing off the bear market, if the Europeans come through with a personal best performance – an overdue personal best.

This is not to say QE3 wouldn’t be an added boon to the current rally and that’s why Fed chairman Ben Bernanke’s speech at Jackson Hole at the end of August will be watched very carefully. Ben has dropped some market messages before at this annual speech.

So, what am I watching?

I’m keeping an eye on:

  • On Thursday, Germany’s Angela Merkel and France’s François Hollande will meet and what is said will be watched closely by the markets. Merkel’s utterances lately have been very positive for market-supportive actions from the ECB in early September.
  • Merkel meets Greek, Italian and Spanish leaders in a series of days before the end of August and into the first week of September.
  • The ECB then meets September 6-7 and what comes out of this will be watched like a Labrador eyeballing a steak on a barbecue!

The next two to three weeks will seal this rally’s fate and I cannot for the life of me believe that the Europeans don’t know how important these decisions will be for financial markets, their economy and the world’s.

Slow and steady

In a perfect world for wealth builders exposed to stocks, I’d like to see the ECB impress the market, QE3 come this month and the Chinese cut rates again. But for a perfect economic world that could create a slow-growing rally that could morph into a solid bull market, I would prefer the ECB over-impressing, the Yanks growing well enough so QE3 isn’t needed and China deliver one more rate cut.

If Europe brings its best game, the US and the Chinese economies will instantly benefit from the stock market confidence effects and the rise in demand from a stronger global economy.

‘Me waters’ are telling me that we can trust the Europeans, but my head and my sense of history has stopped me going madly long ‘me waters’!

I’ve been on a good thing and so I will stick with it, but I really could do with Charlie Aitken’s confidence.

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 consider the appropriateness of the information in regards to their circumstances.

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