The XJO forum is largely made up of (very good) technical analysts. As such i’m hoping to provide a fundamental context to add to the technical analysis and hopefully draw a clearer overall picture. This is a fairly rough outline of the current fundamental situation as I see it, so please correct me as you see fit!
Currencies: USD has been falling recently on the back of speculation about a change in the currency quotation of Oil. Also i would suggest an increased appetite for risk has seen a massive move from safe haven USD to equities, which has pushed USD and Equity markets up. Due to the massive international nature of this transition i would imagine that there has been a big pricing over-reaction that is now becoming apparent. Short and medium term as this stabalises this will have a negative effect on the market.
Interest rates: interest rates around the world are at ‘emergency’ and all time lows. This means in the near future they have to go up. Negative for equity markets. Monetary policy: Stimulus packages have created massive debts for governments around the world and somehow they need to be brought back under control. These stimulus packages have seen a transfer of debt from private companies to governments, and the governments must, at some stage pay these debts off and withdraw stimulus policy. There is already talk of this happening in the US by early 2010 and the same goes for Australian stimulus policy.
Indicators: Over the two months, confidence indicators and various other measures of the economy have been mildly positive however more recently the results have been mixed. Lagging indicators have been suggesting world economies are stronger than previously thought (stronger than what ppl thought in march), while leading indicators have been suggesting that the picture isn’t so rosy (ie currently, stocks are priced higher than they should be).
Conclusion: The September highs in equity markets were the result of irrational buying. Prices of stocks during this month were higher than conditions and company earnings warranted. As a result we are seeing the long awaited correction! The risk therefore is that stocks will become oversold, and therein lies the opportunity. To take advantage of this everyone needs to know what price stocks should be in the current market climate, given the above mentioned factors, and company earnings/prospects.
My view is that we will continue to see another day or two of losses, possibly another week. There will then be a period of consolidation with slow gains over December through to march. The next move up will be a lot slower as investors will require stronger company earnings reports and a stabilisation in world economies before they risk their hard earned. I thought stocks were fairly priced in mid august to early September, so perhaps that is where consolidation will occur.
Disclaimer: DYOR research this isn’t investment advice, rather, its the speculation of a hack uni student who is using this as a means of procrastination!
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