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Are we nearly out of the woods?

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by Peter Switzer

Stock markets are unusual beasts and they go through three stages, which reflect investor attitudes. The three can be summed up as scared, uncertain and confident.

We’re in the uncertain stage now and within the uncertain stage there are two sides — uncertain bordering on the negative and then of course there’s uncertain bordering on the positive.

In the uncertain stage, investors will oscillate between the two extremes. We were in the positive side until a few weeks ago and now we’re heading back towards the negative.

Scared or confident?

We’re now playing a waiting game where a number of big issues will determine whether we head towards the confident and boom stage or we sink back into the scared zone.

The US election and the fiscal cliff could take us into this scared zone along with a hard landing for China and some silly developments in Europe.

However, if they turn out to be better than expected, we could slide into the confident stage in 2013.

Companies report

For the next few weeks, US reporting season will be used as a guide to where investor sentiment heads and there will be a special emphasis on the outlook statements of the big name companies such as Apple, IBM, Caterpillar, FedEx, the big banks, etc.

RBS Morgans chief economist Michael Knox has a positive view on China’s future course and he tips US outlook statements in the fourth quarter should be more positive compared to the third quarter outcomes, which will be revealed over the next few weeks.

He has the S&P 500 heading up solidly and this will help drive our market up as well. Bank of America/Merrill Lynch are in the same camp with a target for the S&P 500 of 1600 in 2013 led by big cap stocks.

On Wall Street

Overnight, the Dow was down 26.5 points or 0.19 per cent to 13,583.65 while the S&P 500 was off 5.05 points or 0.35 per cent to 1455.88.

Fears were raised when the World Bank lowered its growth forecasts for the East Asia and Pacific region but the Bank isn’t a great forecaster.

Concerns over Spain are still unsettling Europe but next Monday the European Stability Mechanism officially kicks off and all eyes will be on Spain to see if it asks for help.

In the uncertain stage, small stories can swing the market up and down but it will only be big left-field stories that will knock us back into the scared zone.

Interestingly, in the US, the proportion of asset allocation to stocks by Wall Street strategists is the lowest in 25 years. History has shown that when we’re at our most scared, the good news usually comes along and drives markets up.

We’re not out of the woods yet but I reckon I’m closer to making this call than I have been in four years!

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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Published on: Tuesday, October 09, 2012

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