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Is it safe to go back in the water?

Now that the Reserve Bank has cut interest rates and Europe has a rescue plan the big question is — is it safe to go back into stocks? And the answer to this question is — it depends on who you are and what your appetite for risk is.

The apt comparison takes me back to Noosa in the 1970s. When I was a long-haired surfer, fresh out of university prowling the coastlines of northern New South Wales and Queensland looking for great waves and a good time, I had my first close encounter with what we in the surfing fraternity call ‘Noah Arks’, or sharks.

Over the years when the shark alarm would ring at my home beach of Bondi, I would go in just because I valued life. One day in Noosa in the 70s the shark alarm went off and lots of surfers stayed in the water. I asked a nearby surfer why they weren’t concerned and the answer was, “Oh, there’s so much fish up here, they don’t need us”.

I accepted the answer but still paddled into the beach break while the courageous or foolhardy stayed out the back!

I adjusted my risk given my own appetite for it and on the basis of new knowledge. That is exactly how investors will have to play current market circumstances but what are our options that can determine how we invest right now?

The negative view

There’s the negative view, which was summed up neatly, albeit frighteningly, by Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura Securities International in London.

“This latest round of euro zone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set up an even worse financial outcome,” he wrote in a notes to clients. “I strongly believe that we have begun, or (are) about to begin, the next major risk-off phase, which should culminate in my secular targets being hit in 2012.”

He thinks the S&P 500 is heading to 800 or 900 and it’s now 1218! That’s a fall – no, crash – of around 30 per cent!

“The sharpness of the rally from the October risk lows suggests strongly to me that what I thought would be a process that plays out over a year may well now be a process where the timeframe has been accelerated by a quarter, maybe two quarters,” he warned.

The positive view

Now that’s the negative view but what is the positive one?

It starts this way — the European plan, which includes a trillion euros for the European Financial Stability Facility (EFSF) and the banks that have mistakenly lent to Greece and have agreed to take a 50 per cent haircut, has been created. The 17 members of the EU agreed to this and it puts in place a plan where no plan existed. It’s a start and has raised the confidence of the stock market.

It comes when the latest economic data out of the US and China has come in better than expected. The Chinese were tipped to face a hard landing but the latest growth figures rule this out, though the latest manufacturing data was weaker than expected.

Over in the US, a double-dip recession was predicted by the doomsday merchants, but the latest quarter showed economic growth was 2.5 per cent, which is miles away from the negative growth of a recession.

And over October as Europe plus China plus the USA all came up with better than expected economic and political outcomes, the Dow Jones was up 9.6 per cent, the biggest month since October 2002, which of course followed the Dotcom Crash. 

The short-term

In the short-term, we could see a bit of a sell-off to counter the big October gains but the next two months are often good ones for stocks.

“November from a historical standpoint is not a bad time to put money to work in the market… we tend to rally into the end of the year,” said Tom Schrader, managing director for US Equity Trading at Stifel Nicolaus to CNBC.

For the longer term I like the thinking of Sam Stoval, the chief equity strategist at S&P Capital IQ.

“If you believe what we experienced was a bottom at the 1099 level, and that it was therefore a near miss or a ‘baby bear’ market, depending on closing or intraday prices, then history suggests but does not guarantee, that we could have a pretty nice move over the next 12 months.”

From April, the US market fell close to 20 per cent but has now come back about 11 per cent.

After big corrections, using post-1945 stats we have seen market comebacks to the tune of 13 per cent for the first three months, 23 per cent for the ensuing six months and 32 per cent for the year that followed.

Not out of the woods

The summary is we’re not out of the volatility woods yet. The European Central Bank cut interest rates, but few in the G20 said they would kick into the EUs bailout fund.

This means for the courageous, not afraid of sharks, especially those from Greece, you can buy the dips, but for the cautious sitting on the beach with your cash, it’s an OK strategy. The only risk is that you might miss a few really big waves of stock price surges while you deal with your justified, stock market anxiety.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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: Monday, November 07, 2011

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