I have been investing/trading since 1990, I hope this puts things into context. First of all I don't want to sound like one of these perennial bears who have been calling a crash since our mkt rose towards 4000 points. I have been a bull the mkt and particularly resources for about 5 years. Until this year I thought although the mkt has risen very strongly it was not expensive and was simply following earnings and the fundamental outlook. It was clear last year that many brokers were factoring in major falls in commodity prices when valuing the likes of bhp and rio. This was a mistake given this boom can be compared to previous booms this century where commodity prices actually held at high levels for long periods.
This latest leg up in commodity prices this year to me seems not to do with the fundamental story but rather people diving into alternative investments or the latest fad, pouring their retirement money into the latest commodity fund that fund managers are starting up left right and center. These products are started for the purpose of investing in commodities and therefore they must pile into thin futures markets when compared to the mug money pouring in, so the fundies have to buy, not because they think its sensible , rather because joe blogs cab drivers are demanding these products.
Therefore we have gone from broking houses factoring in large falls in commodity prices, more towards valuing resource companies on spot prices that are pumped up by ignorant punters. Therefore after being a resources bull I fear a sever correction could occur wiping off around a quick 30% even in the bhp's and rio's, I do believe then things could look so bearish that it could create a massive buying opportunity then.
Perhaps my bigger concern in our market, especially witnessing todays trading, is the strength of the banks alongside of resources. This has prompted me to not only be entirely in cash but have a small short on aswell. Today the CPI came out and is showing signs of the core inflation feeding through to the top of the RBA's comfort level. It is easy to now find economists predicting a rate rise as early as next week or if not then not long after. We saw today bond yields rise another 10 points to their highest in over a year. This is at a time where the surging petrol price will also put pressure on consumers on top of a potential rate rise. Yet the banks power ahead to rise 1 or 2 % again to all time highs, do we still call this a "flight to safety" rotation, yeah right. The banks will give anyone whatever loan they want these days. Also making me nervous about the mkt is I can not read the weekend papers without articles about how margin lending in shares is they way to go. I also come across ads after ads about getting rich with the leverage from CFD trading. Personally I haven't heard tips from the cab drivers yet but I know someone who has! I do have friends who know I am interested in the stockmarket, but we never have had a conversation about it for 5 years, well now they ask me questions about it. This post is getting long-winded but I wanted to say I am not perfect, I have been geared the mkt and overweight resources for 5 years. As the mkt broke through 5000 points I have been gradually avereging out selling, so at this point maybe I am a fool, missing out on the latest gains. But in the last week I have gone to having no holdings with a small short on the SPI today. The only thing I can get bullish on now is soft commodities, which are well well below their previous peaks in history, yet i feel the fundamentals should support these markets as they have for the metals over recent years. So far I have positions in coffee, cocoa and sugar. Other than that I am sitting in cash with a small short on the SPI. To those who plan on staying long this market, if you make a truckload of $$ as the mkt shoots past 6000 points I take my hat of to you, you well and truly deserve it giving the risks you are taking now.
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