Hold Your Nerve

Call it a feeling in my waters; call it stockbroker’s intuition. I picked the low point of the market in October, and now I’m calling a peak '” at least for the next few months.

A month ago, on October 24, I wrote: "My gut feel remains that we are somewhere very close to the physical bottom of this trading correction in Australian equities. I think there's a good chance that the market saw it's physical low at 11am on Friday, and from that point we have seen genuine institutional buy interest at a stock specific level in over-sold situations"

That proved spot on '” 11am on Friday, October 21, did prove to be the low point of the October trading correction. Since then the recovery has been spectacular, with many leading global growth stocks rebounding by 15% and the index back at record highs, driven by a combination of bank and global cyclical strength.

Now I’m tipping the market has reached a temporary peak '” at 11am on Tuesday, November 22. This will prove to be the high for the market for the next few months.

It's a pure gut feel call, yet gut feel serves you best in these situations. There is a cumulative 400 years of stock trading experience sitting around my dealing desk at Southern Cross Equities, and to a man everyone looked at each other on Tuesday and said: "That was the top."

We saw "trading exhaustion", with the index pushed back to record highs and simply not being able to go on with it. Tuesday's intraday reversal from record highs showed the index is exhausted from a trading perspective, and we are going to see a period of consolidation and selected profit-taking.

The trading market will use the excuse of oil prices bottoming to take some equities profits, and in Australian context we have to also contend with a wave of fresh equity supply before Christmas. Up to $8 billion of new equity hits the market in December, and even in the cash-rich Australian market, that is a lot of supply to swallow.

Remember, the market is also broadly ex-dividend from this point, while we are only two weeks away from school holidays, and many key decision makers won't be at their desks. We get no earnings news until February.

This is what I think will unfold over the next two months, and again, it's based on pure gut feel.

There will be no "Christmas Rally" in Australian equities; you've already seen it. The market will consolidate in a 150 point trading range below the all-time high of 4680. The market will find great resistance at that point for the next two months, and will not get the direct catalyst to breach it until the better-than-expected February reporting season.

I foresee two months of trading consolidation and falling volumes as the market comes to grips with the new anonymous SEATS trading system. (The new system does not allow traders to see who has been buying and selling stocks until after the market closes; previously trades could be checked in real time).

Sure, take some profits if you feel like it, raise a little cash if you want, lock in some of the last months' gains; but don't get bearish. That would be a mistake in the medium term.

I don't want you to start turning bearish just because the market stops going up for a couple of months; I want you to consider how you want your portfolio to look like when we emerge into the February interim reporting season.

I've just got this feeling that "growth" is going to annihilate "value" in 2006, and you want to emerge into February with a very growth-biased portfolio. Growth at a reasonable price (GARP) is what we want to be exposed to, and I suspect some for the GARP stocks will become GAAP (Growth at any price) stocks as 2006 unfolds.

I want GARP plus transparency and visibility of earnings. The US Federal Reserve will end raising interest rates, and you will see the mother of all growth rallies. However, we have a few months to use the consolidation in leading Australian GARP stocks to get set for that event.

Do not emerge into the new-year with a portfolio of "growthless yield" '” that would be the biggest mistake you can make.