MARKETS SPECTATOR: Vendor vacuum
Earnings season is failing to deliver any frights and consequently there doesn't seem to be a seller in sight.
We’re now sitting at major technical resistance yet there doesn’t seem to be any let-up in the buying pressure. There’s the odd short-term profit taker here and there, but I genuinely believe that money already invested is going to stay put for some time to come.
If this proves true, then the biggest issue this market faces is the fact that there is no ‘net seller’. Sounds like a pretty good problem to me.
It really is as simple as demand versus supply. Everyone knows the reasons why money is flowing towards equities but equally as important, in my eyes, is the sell side of the equation.
Towards the top of the cycle in late 2007 and early 2008, everyone was heavily overweight equities. The investment community was positioned very long after a number of years of stellar bull market performance. At that stage, there were a lot more potential sellers than buyers. Now we are seeing the exact opposite.
Outside of profit takers, no one in their right mind is looking to reduce their overall weighting to equities. In fact, based on price action and what I’m hearing on the street, the exact opposite is occurring.
So no net seller means we suddenly have a demand-supply equation stacked very firmly in favour of the bulls.
The first half 2013 earning season was supposed to be the event that brought the rally to a grinding halt as the fundamental side of the equation couldn't live up to hyped-up share prices and expectations.
Well, based on what I’ve seen so far, nothing could be further from the truth. Three cases in point.
Commonwealth Bank, which has gained a staggering 39 per cent since its lows mid last year, is up another 2.5 per cent after the result (which everyone said couldn’t beat expectations, but which did exactly that). CBA is now in blue-sky territory, trading at all time highs and likely to continue on doing so for some time.
Another classic case of everyone looking in the rearview mirror has been the discretionary retailers. They have been one of the worst performing sectors and are finally just starting to move as everyone quickly realises the cycle has bottomed.
This was highlighted earlier in the week when JB Hi-Fi (JBH) reported a ‘less bad’ result that beat expectations. However, the real icing on the cake was the upgrade to full year earnings guidance which put a rocket under the stock – and the sector. It also squeezed the hell out of the huge short positions which had been betting on the death of ‘bricks and mortar’ retailing.
If these results weren’t enough, outlook comments from Bradken (BKN) yesterday soothed the few remaining nerves, and sent the stock up more than 18 per cent in two days.
So, judging from what I am seeing so far, there does not look to be too much concern surrounding the earnings reports already released.
Having said all this, there will be a pullback of some sort and at some time. I’ve tried to predict it before and failed miserably so I am just going to let the market do its thing and ‘stay long until proven wrong’, to quote a famous trader.
Every man and has dog are waiting for a pullback, which is probably the reason why we have yet to see it. When everyone is expecting the same thing the market has an uncanny knack of doing the exact opposite, and I suspect that is what we are seeing at the moment.
The pullback will begin when those that having been waiting to ‘buy the dip’ throw in the towel and just buy at current prices.