MARKETS SPECTATOR: Terrible advice

Retail investors in the US have been missing out on one of the great bull runs, thanks to professional market strategists who advised them to go underweight equities. If they jump back in, expect another stock surge.

image

The above chart paints a very interesting picture, both for US markets and locally. The blue line shows that market strategists’ recommended levels of equity holdings fell to a record low in June 2012 just as the market embarked on a monster rally. Strategists recommended allocating 41 per cent of portfolio’s to equities.

The problem is that they were blatantly wrong! Since the beginning of June 2012, the S&P 500 has rallied more than 11.5 per cent, leaving a large percentage of investors watching from the stands as the market took off.

The implications for this are huge. We suddenly have a large percentage of participants underweight a bullish market. Assuming we get through the election and fiscal cliff relatively unscathed, we’re very likely to see a ‘fear of missing out’ or FOMO rally ensue as those who missed out chase the market.

While we haven’t got exact numbers for the Australian market, the situation is fairly similar with near record amounts of money sitting on the sidelines. With cash yields depressed, it’s only a matter of time before more and more participants are forced back into higher yielding equities. On top of that, FOMO will also drive money back towards equities if markets continue to run higher.

Obama's Bump

A cloud of uncertainty was lifted shortly before 3.30pm as President Obama won the swing state of Ohio and hence, a second term as US President. Ahead of that, markets had been acting nervously with US futures down by around 1 per cent as the tight race unfolded.

Almost immediately, attention turned towards the next big unknown, that of the fiscal cliff and how President Obama will reach a compromise and solution for the nation’s enormous budget deficit.

It’s still a big unknown, and until we get a better idea as to how this will play out I think it’s going to be hard for stocks to move meaningfully higher, especially in the US.

The positive to come out of all this is that at least we have a winner; a contested election that dragged on for weeks would have been the absolute worst case scenario for markets. There’s no doubt this is a step in the right direction.

On the local bourse, the benchmark index had been hanging onto modest gains for most of the session before jumping on news of Obama’s re-election.

image

Source – Iress

Price action paints an increasingly positive picture too. The above chart of the S&P/ASX 200 index shows that on Monday the market successfully tested the key major support area around the 4440 level, indicating a willingness for buyers to step in.

The ensuing bounce was fairly typical of a rally within a short term downtrend. That was until this afternoon’s election news saw the market surge through the psychologically important 4500 level as well as the short term downtrend line, indicating an important change in momentum.

This change in momentum points towards a move higher in the short term, although a lot will hinge on how markets react during the session this evening. Even if US markets struggle to make much headway, there’s every chance we will continue to see Australian equities outperform their US counterparts.

A contrarian thought. No one’s expecting an easy and swift solution to the fiscal cliff. Markets are pricing this in, including the same sort of brinkmanship we’ve been seeing since this standoff began 18 months ago. While it’s probably the most likely outcome, any indications of a willingness to compromise on the Republicans behalf would put a rocket under the market.