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It’s profit-taking stupid

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by Peter Switzer

The big stock markets of Europe lost over one per cent overnight and some pundits tried to blame new Greek issues, but the more likely argument was that it was simply profit-taking after a great run up for stocks since early June. On June 4 the German DAX index was at 5978 but it was at 7089 before last night’s sell-off. That’s an 18.6 per cent gain and so you should not be even doubting that it was time for some winners to take some profit off the table.

When I see my media colleagues looking for reasons for any slightly down days on markets nowadays, I simply think — it’s profit-taking stupid! It happened only slightly on Wall Street and our own market the day before, and it was Europe’s turn overnight.

Interestingly, the Yanks had a bit of it going on again but it was not enthusiastic with the Dow down only 30.82 points or 0.23 per cent to 13,172.76 and the S&P 500 flat at 1413.49.

The small negative and flat results for the indexes were helped by the Federal Reserve minutes, which left the door open for a third round of quantitative easing (QE3). This is wise and understandable and that door will only be used if the Europeans screw up in early September.

Sure the Dow has been down for three days in a row but this only proves my profit-taking story. The actual slide was only from 13,271.64 to 13,172.76 — less than a 100 points or 0.7 per cent!

The Yanks did get some more good home sales news for July and prices are on the rise, which are good foundations for a better US economy, however, outlook statements from top US companies are not glowing and the reason is Europe.

That’s why what happens in Europe over the next few weeks will be critical to this rally.

There’s a lot riding on EU leaders and the European Central Bank — I really hope these under-achievers can pull it off.

If they don’t, the Fed will go for QE3, and they will need it, and our Reserve Bank could and should cut interest rates to shore up confidence that will slide if the ECB fails to deliver a credible plan.

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: Thursday, August 23, 2012

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