MARKETS SPECTATOR: Christmas gifts

Once again, the Australian market has followed the sharply weaker overseas leads and sold off significantly, with the materials sector doing the bulk of the damage.

I said yesterday that I thought we were close to a short term bottom and due for a bounce. I still think that's the case but I'm starting to realise that there's much more worrying markets than just this fiscal cliff.

Markets clearly hate uncertainty and we're seeing more and more pop up daily. A week ago nobody was talking about Europe and Greece, yet now they have joined the headlines alongside the fiscal cliff. Oh, and just for good measure, there now looks to be a lot of political uncertainty in the Middle East after Israel decided to flatten the Hamas-controlled Gaza strip overnight. A Middle East war would be the icing on the cake!

Given all this, it seems participants have decided to err on the side of caution and head towards the exit. I get the feeling that it's becoming too hard for a lot of investors and they're just going to sit out and wait for some of the uncertainty to lift.

Regarding the local market, I'm bewildered as to why there is so much weakness, especially among the materials sector today. I don't quite understand why investors are selling China-facing assets when China is showing clear signs that its growth bottomed during the third quarter.

Perhaps we're going through a period where buyers are willing to wait on the expectation that they will be able pick up stocks cheaper in a few weeks' time. If this is the case, I think it's a dangerous game.

It's well known how underweight equities Australian institutions are as well as how much cash there is on the sideline. It won't take much institutional buying at all for this market to bounce significantly, especially when people realise that a lot of the worries in the world hardly affect Australia.

The tide is turning for cyclical retailers

After one of the most brutal, if not the worst periods for domestic cyclical retailers, there finally appears to be some light at the end of the tunnel.

The chart below, which displays the ASX retailers subsector over the past four years, shows just how damaging the cycle has been. After recovering strongly following the bear market low of March 2009, the sector peaked around the beginning of 2010 and has subsequently lost more than half of its value into the lows of 2012.



Source: Iress

Nonetheless, the sector has and is still facing some serious headwinds including Australian dollar strength, online competition and new entrants, just to name a few. However, judging by the price action on nearly all the major retailers' charts, the bad news looks to be well and truly factored into current prices.

On top of this, a few of the major brokers have recently become more positive on the sector. Citigroup recently published a report titled Is it time for some fun in the sun?, in which it discussed some of the positives it's beginning to see in the sector.

The broker believes sales trends are stabilising and discounting is reducing in fashion categories. Not only are sales trends improving, they are magnified by better gross margins, Citi said. It is also encouraged by less widespread discounting and shallower discounts being offered by the department stores.

The market is also forecasting a pretty strong Christmas trading period as the product suite on offer is one of the strongest in years, thanks to items like the iPad Mini.



Source: Iress

As you can see in the above chart, the retail sector bottomed in line with the broader index mid-year and has since confirmed the beginning of a new uptrend by breaking up through its downtrend line and continuing its positive momentum.



Source: Iress

A lot of the major stocks within the sector are starting to move higher as well. The chart above shows the best performers since the middle of the year. Premier Investments, under the guidance of ex-David Jones chief executive Mark McInnes is well and truly leading the way, up more than 40 per cent from its lows.

Myer and JB Hi-Fi have done pretty well too, both up more than 30 per cent and easily outperforming the retail sub sector, which is up 18 per cent. Interestingly, Citigroup has recently upgraded Myer to buy and has chosen it as its best pick in the sector as it sees its low PE ratio and better fashion spending providing near-term upside. Today's first quarter sales result also impressed, triggering a 4.5 per cent rise in a down market.