MARKETS SPECTATOR: Riding this bull

As I sit back and look at this market, I can’t help but think, one, how strong the rally has been and, two, we must be due for a pullback, especially given we’re within reaching distance of major technical resistance.

Yet just when it looks like some sellers are starting to enter the system the market breaks out, like it did this morning, rallying to fresh 22-month highs.

In a normal market, you simply don’t see 25 per cent gains from June to February, or 27.2 per cent if you’re looking at the S&P/ASX 200 Accumulation Index. And in a normal market, major indices like the S&P/ASX 200 don’t rally 11 out of the past 12 weeks without blinking.

So it begs the question: are we in a normal market? I honestly don’t think we are.

We’re in a market when investors basically have no decision on whether or not they want to buy high yielding equities. Anyone who wants a real return on their money is being forced to buy large cap sustainable yielding stocks.

Yes, the market has had an incredible run and maybe it’s looking a bit stretched in terms of valuations. But ask yourself this. Is an investor going to choose a cash return of around 4 per cent over a stock yielding 8 per cent fully franked because, one, it may be a little expensive and, two, because it’s had a very strong run. Of course they’re not, it’s a no-brainer in my mind.

So while it’s blatantly obvious I’m bullish in the medium and long term, I’m struggling a little in the short term.

image

I think we’re on the cusp of a pullback. The above chart of the S&P/ASX 200 index shows that we’re only a breath away from major technical resistance (green). The series of uptrend lines that I have drawn also indicate that upside momentum has been increasing. It’s now come to a point where I don’t think the speed of gains can be maintained, certainly not in the short term anyway.

I’d be absolutely staggered if we don’t see some sort of pullback around this zone.

Having said all that, the reason I’m so bullish in the medium to long term is simply due to the great rotation into equities that has only just begun.

So while I think there is a pullback nigh, I think there is the very real risk that one could try and get too cute by selling and trying to buy back in at a lower price.

You’ve probably gathered that I’m really torn on this subject. There is probably two ways to play this market depending on your current positioning.

For those of you who have yet to enter the market, I think you’ll get a better entry point over the next month. Having said that, don’t be too greedy because it will be a shallow pullback; if you blink you may miss it.

Now, for those of you who are already long I don’t think now is the time to try and finesse the market. I think the pullback will be very shallow as so many are waiting to ‘buy the dip’. In fact, it’s probably the time to deploy more money into the market.

I honestly think we’re in the relatively early stages of a bull market here. Markets always have a tendency to go way further than anyone thinks possible, in both directions. One of the hardest things to do in bull markets is to hold on long enough, especially when we’re coming out of a five-year bear.

During the GFC and accompanying bear market, the rubber band was stretched a long way to the downside. The more you pull it one way, the harder it will eventually snap back the other way. I think we’re seeing this playing out now.

So much money left the market over the last five years. Now we’re seeing it beginning to return.

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Thanks Ben for the interesting overview - it reminded me of one of my favourite quotes from Scott Fitzgerald: "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." (MARKETS SPECTATOR: Riding this bull, February 8.)
So while it's been easy - and right - to be long for the last 6 months now is probably the time to be thinking of some of the downside risks and paying a bit more attention to guys like John Hussman and his recent notes.
Absolutely Ben. However, what better time to buy, than after 5 years bottom dredging (MARKETS SPECTATOR: Riding this bull, February 8).
As you correctly say, there are trillions of dollars just looking for a home. Strange as it may sound, it is that simple.
We all know that only 1% of equity buyers buy at the bottom of the market. The PE is around 15, so, the other 99% will find out, sooner or later.
Agree. For me, it is time to watch closely to buy when the market dip (MARKETS SPECTATOR: Riding this bull, February 8).
The basic elements of a bull market push is coming from two sources: First, the funds are being moved by unhappy investors from low yielding bonds and cash, into equities. This creates demand for high yielding stocks, pushing equities up. Second, the improving situation associated with the EU troubles, the improving Chinese economic situation, and the improving US economic situation so I think the market has a way to go. Until, interest rates start to rise. My opinion only. (MARKETS SPECTATOR: Riding this bull, February 8)
Great example of using statistics to help your story, did the Market not plummet in May 2012, if you take that correction out what is the real gain ? And still no where near the pre crash highs of 6800 points, where as other markets around the world have recovered and we still need at least a 40% increase just to get back to where we were accounting for CPI. Here's hoping local investors do not get the jitters at the 5000 point mark ! (MARKETS SPECTATOR: Riding this bull, February 8)
Hi Ben,
Once teh resistance around 500 is broken what's the longer term target? 6000pts? (MARKETS SPECTATOR: Riding this bull, February 11)