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Pullback on the way?

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by Peter Switzer

How good is this rally? Well, compared to the market in 2008, this is an overdue lucky break, but for those who are out of the market and want in, is it too late? Or is there a pullback overdue?

At the beginning of August, these were the big numbers that screamed investors were not expecting a Great Depression Mk II:

Since early March, the Dow was up 41 per cent. The broader and more important S&P 500 was up 47 per cent. The tech-laden and more internationally-exposed Nasdaq index was up 55 per cent, while our own S&P/ASX 200 had put on 37 per cent.

March lows long gone

The stock market had seen off the short-sellers and the bears and the only cry that bulls were prepared to listen to was that a pullback was coming. But how bad might a pullback be? That’s an important question for short-term traders who want to make profits in a hurry and avoid losses, but long-term investors really only need to feel the worst is behind us. They need to know that the March lows are dead and buried.

Of course, you can’t know anything in this investing in shares game. Julia Lee of Bell Direct thinks a pullback could happen but can’t see shares plummeting to March lows. Switzer Expert Lance Lai, who advises ACE Capital for Japanese investors, has turned from being a bear to a temporary bull and it’s his charts that have led him to this conclusion.

Head and shoulders

I recently had Lee and Lai on my SWITZER program to explain the so-called “head and shoulders” pattern that was tipping a fall in the stock market. They showed both the S&P 500 and S&P/ASX 200 created a pattern that looked like a shoulder followed by a neck and head followed by a shoulder. History says this often precedes a market fall but it didn’t happen this time — history as a guide doesn’t always work out.

Lai actually showed that an inverse head and shoulders pattern has recently emerged and that, by the law of opposites, should point to more upside for shares.

Less bear believers

There are still experts who think this is a bear-market rally, but they are becoming thin on the ground. Buying the dips seemed to be a good strategy but no dips have happened for more than two weeks.

If you can’t hold your nerve for the pullback, maybe you could think about putting half of your investment to work and if the market falls you can buy into a falling market. Waiting will take guts and could prove costly.

News watch

Analysts are all turning positive. Floats are starting to come out of the woodwork and the economic data is not disappointing, but it could be the factor that turns these rallying markets.

The big watch will be on US job figures but with manufacturing in most countries nearly getting into positive territory and companies all lean and mean after cutting costs, the economies of the world are just waiting on the confident consumer to replace government spending.

Unemployment levels and confident consumer are inextricably related and could make or break this rally but once again I am leaning to the positive, though I expect a pullback but that should not stop long-term investors getting into the game.

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: Wednesday, August 05, 2009