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.



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.




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.



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.