MARKETS SPECTATOR: Mini rallies

You won't have to have looked too far to have read ‘the GFC is over, the game has changed and now you need to buy the pullbacks’.

So, everyone is patiently sitting there, painfully watching the market move higher while waiting for the pullback so they can finally buy into the market.

In a ‘normal’ market, a pullback is typically in the realms of 5 – 10 per cent and this is what everyone is expecting.

Well, I’m here today to tell you I don’t think there will be a pullback, well not in the true sense of the word. With so many buyers lining up to buy the pullback and coming out of the biggest market event since the Great Depression, I think the best we are going to see are ‘mini’ pullbacks, somewhere in the vicinity of 2.5 – 5 per cent.

We’re already starting to see signs of FOMO entering the market, which is the ‘fear of missing out’. When the market does have a mini pullback, those buyers waiting simply cant afford to and wont wait for a 3 or 4 per cent mini pullback to turn into a 5-10 per cent ‘normal’ pullback. If they do, they’ll miss out! Hence the mini pullback.

The three charts below illustrate that this buying on ‘mini’ pullbacks is already occurring.

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Source: Iress

The above chart of Woolworth’s shows that after falling 2.2 per cent immediately after its earnings release, it has since rallied 5.9 per cent in about two weeks.


image

Source: Iress

The same was the case for Wesfarmers. In the above intraday chart, the stock fell a tiny 1 per cent post earnings before rallying 3.9 per cent in a couple of days.

image

Source: Iress

It also happened with News Corporation, although the pullback was 4.9 per cent in this case. Since then, it is 6.5 per cent higher.

So we can see that the money is aggressively coming in to stocks as soon as they show any sign of weakness. We’ve even seen it with ANZ’s result this morning.

The price action among the most shorted stocks on the ASX also tells the same story. The likes of JB HiFi, Bradken, Leighton Holdings have all seen price surges this week as they released OK results. All the shorters were positioned for a bad result and the fact that they were ‘less bad’ saw them all running for the exit door.

The problem was that there was a lot of fresh buyers looking to buy the stock too, which just added further fuel to the rally.

One of the most encouraging signs for me that we are firmly in the early phases of a sustained bull market is the fact that many analysts are still too negative. This is typical of an emerging bull. You can see this by the number of ratings downgrades recently simply for the reason that ‘prices have run too far’.

They’re too busy looking in the rear view mirror at recent bear market valuations rather than realising we’re at the beginning of a cyclical upturn.

As is always the case in bull markets, the next three or four years will see stocks trading at ridiculous valuations with P/Es up around the 25 times level and dividends around the 2-3 per cent level.

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You could be right...but I'll be holding on to this article in the event you are wrong. (MARKETS SPECTATOR: Mini rallies, Feb 15) I'll post it back here when the market does pull back hard. At least when some of the current 'all time high' stocks that mums and dads are piling into do. The only reason that people are getting into this market is because it is being 'talked' up. Yes, some stocks may be undervalued but most are not. On an individual stock basis, some of the ASX stocks are trading at all time highs. People are chasing the dividend yield not realising that they WILL lose more than the cash rate differential off their capital. Franking aside, there is NOT enough risk premium above cash rate factored in to the current yield offering on most stocks. Only when US interest rates get back to at least 3% and our dollar around the high 80s can we say that the world economy is sound enough to warrant a real bull run.
It's always the same with these market commentators... (MARKETS SPECTATOR: Mini rallies, February 15)
"Now we are in the first stages of a emerging bull market as part of a cyclical upturn"... etc etc.
It makes me wonder why they bother to write an article on this, rather than making a fortune punting shares. Seeing as they know what the future brings.
Truth is these guys are just promoting a line for something to say. Next week, when there is a market fall they will tell us that they knew that was coming too!
It really is too much to believe.
Yes, we are in a bull market with sand legs (MARKETS SPECTATOR: Mini rallies February 18). The market rallied because the interest rates went down and because people expect them to go down. Isn't it paradoxical if not funny, that markets are up, when people's jobs are going down and we haven't done our big job of deflating the housing bubble and deleveraging?