No one knows with absolute confidence what the next significant driver of the market will be, but I have identified the numerous forces that can’t be ignored in determining your strategy to investing right now.
After all, you could be someone who is wondering if you should pocket profit, wait for the drop and then buy in again. Or you could be very long cash and you are kicking yourself about missing the market’s latest recovery.
Worse still, you could be agonising about whether this is the start of a boom or bull market. I have an interesting take on this subject – stick with me and I will return to this soon.
Firstly, here are the big issues to watch:
Negatives
- The Dow went above 13,000 and the Nasdaq beat 3,000 and while that’s good, this hasn’t happened since May 2008 for the former and December 2000 for the latter. The market technical types will test these levels and could result in a pull-back.
- Rising oil prices thanks to Iranian tensions are threatening the US recovery and could cause a deeper European recession. There’s even US invasion talk!
- The Dow ran ahead of the now falling Dow Transports index, which is historically a negative sign, but there is debate over its significance.
- The latest in the ongoing saga of Greece and Europe is that the voluntary agreements with Greek creditors regarding the haircut they have to take aren’t going well. This means a default by Greece could still happen. Thursday is the key day to watch this week because it’s when we’ll see if the bailout deal has legs.
- The US consumer historically can be negatively affected when the price of gasoline hits US$4 a gallon and it’s now at US$3.70.
- The Russell 2000 – the small cap index – fell 3% last week.
- The latest ISM reading for manufacturing was weaker than expected.
Positives
- The US Federal Reserve is hinting that quantitative easing is over, which is both good and bad. Bad in that it means less direct stimulation from easy money, but it also means the US economy is starting to stand on its own two feet.
- The American jobs number this week is expected to deliver 210,000 new jobs and this is a critical number for the market.
- Consumer discretionary stocks did well in the US last week.
- The European Central Bank’s liquidity program is good for the EU and its battle with recession.
- The latest economic reading in the US showed that the economy has been growing at a faster-than-expected 3% rate.
- US stocks’ price to earnings (P/Es) ratios are at 13 compared with their long-term average of 15.
- US retail sales were up 6.7% in February as layoffs hit a four-year low.
A bullish prediction
As you can see, the negatives make you worried, but the positives allay a lot of those fears. And so maybe Laszlo Birinyi of Birinyi Associates could be the guy to listen to, according to CNBC, as he thinks the S&P 500 can go to 1,700 this year!
The index is now at 1,369.62 and so he is very bullish, expecting close to a 24% rally!
The respected Birinyi argues the current bull-market cycle began back in 2009 and that this is the third phase of a five-year bull market and history says to expect a 30% rally.
Of course Australian stocks are negatively affected by our high interest rates and currency as it KOs the profits of many companies. But even so, we would not ignore a big US rally. In addition, it could take the currency down a few notches as the greenback starts to gain stature and value.
What I’m doing
Here’s my view: we could see a short-term sell-off, but I will use that as a buying opportunity to get more of the stocks I want to be holding when the bull market arrives loud and strong!
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.
Also in the Switzer Super Report
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- Paul Rickard: AGL Energy’s new hybrid notes: how they stack up [2]
- Rudi Filapek-Vandyck: The broker wrap: 11 buys and five sells [3]
- Tony Negline: Does your DIY super need an actuarial certificate? [4]