MARKETS SPECTATOR: Stay long 'til proven wrong

The year ahead is looking strong for the Australian market with international money flowing into the system and internal settings very equity-friendly.

I’ve been bullish for the best part of six months now and I have to say, it looks like a one-way street to me at the moment. I really think Australian equities are in for a great year. Just don’t get caught up in all the negative headlines and miss out.

We’ve got a record low in interest rates forcing once "cash only" money into high yielding bluechip stocks, which make up a huge chunk of our index, combined with the beginning of a recovery in Chinese economic data, which is driving the big miners.

It really could be a Goldilocks situation.

One thing I was taught years ago was that major trends tend to continue a lot longer than anyone expects. For example, bull markets always go a lot higher and bear markets a lot lower. Once a trend is underway, it takes a lot of energy to reverse it.

What we’re witnessing is the classic "grow on scepticism" or "climb the wall of worry" phase of a bull market.

And in my mind, it's all been driven by money flows, or "the wall of money" as I like to call it. Post-GFC, we had a situation where everyone was so badly beaten up that a large chunk of money went into and stayed in "safe haven" assets like precious metals, cash and bonds.

Now, through no choice of their own, investors across the globe are being forced out of safe haven assets as they simply can't earn a decent yield anymore.

This leaves one asset class: equities. And in a market like Australia's, this wall of money makes an even bigger impact. The Australian stock market represents about 1 per cent of global financial markets and is therefore very illiquid when compared to the majors across the US, Europe and Asia.

When a lot of money is forced through a relatively small door, you get significant upside pressure. I believe we’re witnessing the beginning of this at the moment.

On top of this, we’re one of the only markets in the world that has a compulsory savings system in place. Each month, approximately $2 billion in superannuation contributions makes its way into the market, meaning even more buyers.

Up until two days ago, the benchmark index had seen a textbook consolidation pattern (I’d like to say pullback, but it only retreated 1.2 per cent from high to low).

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Source: Iress

In the above chart, I’ve chosen to zoom down to an hourly chart simply to show that there are corrections in bull markets. It’s just that they don’t really stand out very well on the normal daily chart.

Given how strong the rally has been over the last six months, all consolidations/pullbacks have been extraordinarily shallow, apart from the only "genuine" pullback in November.

If we’re lucky we’ll hopefully get another few genuine pullbacks to the tune of 5 to 10 per cent. I say lucky because if they do play out, they will represent great buying opportunities.

However, herein lies the problem. There’s a lot of money that has missed this six-month rally, meaning that on even the slightest sign of weakness, people step in and buy. They simply can’t afford to wait to see if it pulls back further for fear of missing out on further upside. This is what makes the consolidations so shallow.

As I said, hopefully we get a 5 to 10 per cent correction so money can get into the market. However, I’m not holding my breath at all. Rather than wait, I think the prudent tactic to use is to learn to recognise smaller consolidations on the hourly chart and use them to enter the market.