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Is a correction close?

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by Peter Switzer

Just when market prophets have been warning a correction of share prices is looming, along come two big, responsible question marks that have rattled stock players.

The first is the worries over China. The second, President Obama’s bank bashing.

First trigger

Ironically, this comes as China revealed it has grown at a slam-dunking 10.7 per cent pace in the fourth quarter.

However, this isn’t the scary factor that has hurt commodities and related share prices. In fact, it’s the opposite.

The big concern is that China will raise interest rates to slow down its growth to contain the threat of inflation. This, in turn, reduces the demand for commodities.

In a sense, China is like an intergalactic space ship that took on the threat of the GFC and a possible Great Depression and it has now received its “mission successful” cue, so it’s “over and out”. It no longer has to lead the world and so it can concentrate on domestic matters.

This is a good thing but as commodity prices for iron ore and coal etc. fall, it hurts related share prices. The Oz dollar is also down about two cents to 90 US cents.

Second trigger

The second correction trigger and possibly a bigger threat was Obama’s plan to make US banks safer. Typically, Wall Street did not like his work and the Dow plunged over 200 points.

Obama wants new limits on the size and trading practices of big banks to prevent a re-run of the GFC, which was caused by dumb, more-than-risky bank practices.

This is what Obama’s statement said:

"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse.”

The news smashed bank share prices with most down four to six per cent.

So, could this create a correction, which is a 10 per cent-plus fall in the stock market? Yes, but it is not certain. Earnings season has been pretty good so far and these could produce a tug of war that could offset the tendency of the market to correct.

On the other hand, this could be a consolidation before the market goes higher again.

Buying opportunity

Another negative for some Aussie stocks is talk that the US dollar is starting to rise which would hurt commodity prices and stocks like BHP-Billiton in the short run. A lower dollar is supposed to help our exporters and so it might only be temporary but it could fuel a correction.

What will I do if there is a correction? I will buy the stocks I love — it will be a buying opportunity!

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, January 22, 2010