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.
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.