MARKETS SPECTATOR: Yields too hard to resist

The market has remain in the doldrums for most of the past week, but a short-term bounce is well past due.

It has been a very poor week for equity markets globally as uncertainties mount and investors head for the exit door. Yet on a short-term basis, markets have reached very oversold levels as measured by any number of technical indicators.

For example, the Australian market is down six out of the last seven sessions, with the only up day being by a couple of points. One of the first things I was taught as a trader was to think buy when the market was down 5 or more sessions in a row and sell when the opposite occurred.

It’s like an elastic band; when you stretch it far enough one way, it will eventually snap back the other way.

Now I’m not saying we’re about to see a sustainable bottom, but we’re at least due for a short-term bounce.

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Source: Iress

In the above chart of the S&P/ASX 200 index, the market has managed to hold above the support level. On the stochastic momentum indicator below, we can see that it has now moved into the oversold zone. The last time it did this was the June 2012 lows, as marked.

The domestic market is now down 5.4 per cent from the recent high after rallying 13.6 per cent from the mid-year low. Up until a few weeks ago, when the market had been rallying strongly, it was amazing how many participants were calling for a pullback so they could finally get back into the market without having to chase prices higher.

It wasn’t long ago that cash levels in the US were at 74 per cent of the total US market capitalisation, which is the highest level in 18 years. We haven’t got specific numbers for the domestic market but it is very close to record levels as well.

Well, one has to always be careful what they wish for because we have now seen a 5 per cent pullback. With everyone wanting to ‘buy the dip’, now’s their chance and I don’t think it will be long at all before the buy argument is too hard to resist.

Three weeks ago, when the market was trading near 15-month highs, high-yielding stocks were seeing plenty of buying. Now, after a 5 per cent decline in the index those same high sustainable dividend stocks are looking even more attractive.

With record low yields on cash, both locally and internationally, investors are going to be forced back into equities or risk taking a huge hit to their income levels.

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