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Boom and bust

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by Peter Switzer

My media colleagues were alluding to a bloodbath on the local stock market following Wall Street’s tumble with the Dow Jones index shedding 223 points or 2.6 per cent, to close at 8,281. But it got worse with the S&P 500 falling 2.9 per cent and the Nasdaq giving up 2.7 per cent.

Look forward, not back

The cause was a worse-than-expected jobs report, but there are a few points that should be made pretty quickly. First, the Yanks are heading into their Fourth of July long weekend and so the volume of the sell off was light. It’s not like last year, when shareholders headed for the exit doors like they did when the Titanic hit an iceberg.

Secondly, jobs numbers are like looking at an economy in a rear vision window. It tells you what businesses were like six months ago when sales were falling and the managers were wondering if they can keep staff or not. Economic life is starting to get better if you believe the more ‘now’ indicators such as manufacturing and services sector surveys, as well as leading indicators, which look forward.

Test the rally

Finally, there are short sellers and ‘wise guys’ always looking for some bad news to test out this big rally which has possibly got ahead of itself. Markets don’t just rise and rise and rise unless we’re in a mad, bad boom, which ends in tears. I think we know a fair bit about this kind of boom and bust.

In fact, we need to see these ups and downs to turn around the important trend lines called — the moving averages. A series of these where the market ups are slightly bigger than the down days and this eventually turns the 50-day and 200-day average movements of the market to the upside.

Indicators to keep an eye on

For the record, US stocks have been down for three weeks and two indicators I watch are pretty interesting right now.

The S&P 500 is down to 896 and it has had trouble getting through the 950-level. Mid-July will be the start of testing of the stock market when the US company profits come out.

Investors are a little spooked with Volatility Index, ending at 27.95 after going under 25 earlier in the week. But this is not a big nor worrying jump in the fear index.

Not all bad

For the purists, 467,000 non-farm jobs were lost in June and the unemployment rate went up 0.1 per cent to 9.5 per cent. Economists tipped 365,000 job losses, but thought unemployment would go to 9.6 per cent, so it’s not all bad news.

The better news was that factory orders went up, yes, up 1.2 per cent in May and that’s the best increase in close to 12 months.

By the way, Alcoa beats the pack reporting next week — Thursday, our time — and while its profit figure will be looked at, the analysts will be more interested in their outlook comments.

Release the bulls?

The mystery of the markets continue, but if my guests on my program SWITZER on Sky News Business Channel can be believed, they are all leaning towards the view that the worst is behind us, we could have got a little ahead of ourselves with this rally but the bull market has begun.

We will see if they are right over the next few weeks.

For advice you can trust contact Switzer Financial Services.

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Published on: Friday, July 03, 2009