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Don’t chicken out

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by Peter Switzer

After the Yanks had the best September on Wall Street in 71 years, the next logical question is — is it up or down from here? Let’s do some vital numbers to understand where we are and where we might be going.

Try these:

The Dow for the month was up 7.72 per cent, 10.37 per cent for the quarter and 3.45 per cent for the year.
The S&P 500 was up 8.76 per cent for the month, 10.72 per cent for the quarter but is up only 2.34 per cent for the year.
The VIX or fear index is down 31.21 per cent for the quarter but up 9.59 per cent for the year!

So you can see this has been a year where fear has dominated markets and it explains why the annual gains have been so weak.

Muddle though thesis

The fear was driven by Euro-debt concerns, bank vulnerability in the Eurozone, a China slowdown expectation, the US double-dipping into recession again, fiscal austerity programs and the best work of short-sellers, hedge fund managers, market bears and book floggers to scare the pants off investors.

And to date the supporters of my preferred ‘muddle through thesis’ are now on top. If you had backed stocks this year in the US you now are in front of someone who went to cash and is lucky to be getting better than one per cent for the safety.

If you had an S&P 500 ETF, you’re up about two per cent plus dividends. By the way, if you were in an Aussie ETF for S&P/ASX 200 you would be down about 5.8 per cent, however, that could be an unfair comparison. I will address this issue later in the column.

The present

So, what’s going on now?

Firstly, there is profit taking, which is logical given the big run-ups for the month and the quarter. Long-only fund managers would have to be brave to resist locking in some profit. It’s also the end of the quarter and there are expiration of options and other contracts on futures markets, which explains some selling over this week. However, it hasn’t been convincing selling.

The future

So, where to now?

On the positive side, oil rising over $79 a barrel can be a plus that the global economic outlook is on the improve.

Also economic news hasn’t been flash but it’s not breeding fear that a double dip is likely and I reckon this has put a floor under the market. Despite that, the market could struggle to go much higher until some surprise economic data comes in, company earnings start up and impress or the US central bank starts QE II — quantitative easing number two.

News overnight

Overnight there was some good economic news with jobless claims falling 16,000 for the week, taking the monthly average to the lowest level for five months. Also GDP for the June quarter was upgraded from 1.6 per cent to 1.7 per cent, which was better than expected. On top of that the Institute for Supply Management out of Chicago said its business barometer went from 56.7 last month to 60.4, which was about five points better than expected.

On the negative side Irish banks need more bailout money and Spain’s credit rating was downgraded from AAA to Aa1.

Rally ahead?

Putting all of the perceived pluses and negatives together, there’s a strong case that we’ll see another decent rally before the year is out. A pullback from here wouldn’t surprise because of the big September quarter rise in stocks but if we see good US company earnings, some kind of QE II happens and we remember that the stock market has gone up significantly — 16 out of the past 17 times! — after November mid-term elections in the States, then a rally is a good chance.

Now on the subject of our market being down around 5.8 per cent, you have to remember that the opening level in 2010 was established from a decent rally at the end of 2009 — up over 200 points from mid-December — and so it started from an elevated level. The fairest comparison should be after we get through the year and possibly see another rally.

That’s my story and I am sticking to it!

For advice you can trust, contact Switzer Financial Services.

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: Friday, October 01, 2010