MARKETS SPECTATOR: The only way is up

Whilst there may be a pullback or two before the inevitable fiscal cliff resolution, all indicators are pointing to sharemarket growth via high yield demand.

Despite business confidence levels falling to the lowest level since the GFC, the Australian market has continued its push higher, albeit on modest volumes as participants continue to focus on upbeat economic data (China) instead of US fiscal cliff and eurozone uncertainties.

The pure yield plays have been the main driver of the domestic market for the best part of six months given the very low interest rate environment. While we expect high yield names to continue their outperformance, we are now seeing the highly cyclical growth sectors, like materials, join the party as global growth metrics beat expectations.

This is very evident today as there are genuine signs of sector rotation. Recent outperformers like telecoms and health care names are being used as funding vehicles, whereby investors raise cash by selling these names and increase their positions in material and industrial stocks.

The positive sign here is that BHP Billiton and Rio Tinto, Australia’s two biggest growth stocks, are very heavily weighted in the overall index, meaning they will continue to push the broader market higher.

Alongside the big four banks, we could be heading for a perfect storm where financials and materials both move higher; this would be very bullish for the index.


Source – Iress

From a technical perspective, the above chart of BHP looks very encouraging. The stock has today broken up through the resistance level, confirming the bulls are in control and that it still remains in an uptrend. From here, we would expect the stock to move towards the next major resistance zone around the $36.50 to $37 mark.

Rio Tinto is not shown but looks equally as constructive as BHP Billiton.

The other big positive is the huge amount of cash that’s likely to come into the market. Previously, this cash has had a choice because it could earn a very good risk free return. Now, with cash rates plummeting to record lows, this money is being forced to look for a new home. The most likely home, in my view is a balance of large cap stocks, both high yielding and growth names.

With confidence in the sharemarket still recovering from the gut wrenching days of the GFC, the first place edgy investors are going to look are the big four banks and miners.

The broad-based S&P/ASX 200 index has now regained all the points it lost in the most recent pullback and finds itself sitting right at the October high/resistance area, as you can see below.

Source – Iress

From a short-term technical perspective, the market has rallied 13 of the last 17 days for a comfortable gain of 5.5 per cent. Given this strength, the odds are now starting to favour a short term pullback/consolidation period before the market resumes its trajectory higher.

While there is a chance it could continue higher and break through to the upside, buying at the current level, which is right at resistance, has low odds of success. The best bet would be to wait for some sort of pullback/consolidation, even if that means watching the market break higher before it pulls back. Trust me, the pullback will come. They always do.

The fiscal cliff does not matter

The sharemarket's year-to-date and recent performance is a conundrum to most people. They simply cannot understand why the market is moving higher given all the doomsday headlines about the fiscal cliff.

The easiest answer to that question is that the market is a forward-looking indicator. Most people investing in the market are doing so with a medium to long-term time horizon, meaning that even if there is a fiscal cliff-led pullback in the coming months they are not too worried.

Basically, the fiscal cliff situation is going to get resolved. It may take another two weeks or three months. Who knows. But it’s pretty safe to assume that sometime in the next year this is all going to be done and dusted. This is why the market is moving higher.

In fact, there are a number of participants, including big institutions, that are hoping for one final pullback before a solution to the fiscal cliff is agreed upon so they can ‘load up’ on stocks at better prices.

And for Australian investors, we have even less to worry about. Yes, our market might follow the US markets lower if the cliff is not sorted quickly, but we must remember that this is a very US-centric problem. One of the biggest drivers of our market is China, and there is no doubt that its economy is starting to recover.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles