Has sentiment in the US changed? Have we seen a short term bottom and now a rally that might confirm recent lows?
I think it looks like the worst news is out and even with further announcements of bad accounting etc from US companies, that the US are now able to deal with the news in a more stable way. With Brazil now "sorted", and some companies reporting reasonably well, CEOs signing off on the books and other recent regulatory moves, I think we may see buying of US stocks starting to increase as those with cash who have been sitting on the sidelines decide to take positions again.
In spite of all the possible downside scenarios and speculation of the Dow going to 6000, I can't help getting back to a few basics. The main basic I look at is the amount of cash sitting on the sideline from private investors and Funds. Now eventually they have to invest. Interest rates are so low that leaving your money in the Bank is not going to get you anything other than to minimise your loss's. The property market would have to be rated at the high end of valuations and so is not as tempting as it was. So that leaves the stock market.
We have seen a considerable and sustained pullback that most people would say equates to what most have been calling for - a return to levels where companies represent good value relative to earnings. Again, I point out that to judge "good value" in PE terms for US stocks, you have to put the companies in the context of the US and NOT Australia. "Supply and demand" it is as simple as that. Therefore PE's are almost always going to be higher for US stocks in a robust market.
So how does this relate to Australia? Well I am of the opinion that we will out perform the US in most areas due to the fact that our economy is in much better shape, and our companies are now even better value than they already where (provided we see a more stable US market and some economic growth). When you have Banks like WBC with PEs below 15 just to name one example, the rest speaks for itself.
So my money is on a return to alltime market highs by March next year. I am now preparing a 6 month plan to take advantage of this while covering for any further downside as well (nothing is "given", the potential for further falls still exist, especially if we get a war or terrorist attack in the US). My primary weapon of choice is XJO ETO's combined with selected Blue chip stocks and midcaps that have proven their stability in tough times and that are due for market revaluation.
I may be wrong about the recovery by March next year but plan to make money even if the market stays steady or drops. I will make the most money if the market rises strongly. We all need a strategy and reasons for it. I believe that in current market conditions, we are in a unique position to really make some serious gains in the event that the market falls, stays steady or rises, but particularly if it rises, having fallen a reasonable distance.
