Wealth Within - Market Report 2 February 2010
Today the Reserve Bank Board will meet for the first time this year and there is strong talk that interest rates are likely to rise by 0.25 per cent on the basis that inflation is moving ahead of the RBA’s target range of between 2 to 3 per cent. I believe that tightening interest rates is a little premature as we are yet to really see the dust settle from the government’s stimulus spending, and we really do not know what to expect from the company reporting season that has just started. Therefore I don’t believe the current data shows the true state of the economy and whether it is really strong enough to weather any after shocks from the financial crisis that may appear in the coming months.
Further to this, it is also important to consider the events in other countries before jumping the gun and lifting our rates. Take China, with whom we are now so reliant on to support our economic growth, where rather than increasing rates, the government has moved to restrict the amount of money banks can lend. Should the RBA take a leaf out of the book of the Chinese and consider this course of action? There are two likely benefits, firstly it would slow down the alarming rise in debt being created per capita in Australia, and secondly, it will not take money out of the pockets of consumers that could otherwise be spent stimulating the economy.
So what can we expect in the market?
There is one thing I know for sure, and that is while it is possible to predict the market with a good degree of accuracy, it will always do what it wants to do. Two weeks ago I was indicating that the market should continue to trade up to our target level of between 5000 and 5200 points into January or February, but instead it has fallen away. That said I did allude to the fact that the market was at a significant resistance level and I was being cautious about buying stocks in case the market turned down into the yearly low earlier than expected.
Sometimes predicting the market is like being a two handed economist, in that you have to consider two opposing views. What I like to do is have my preferred theory while also planning for the worst case so no matter which way the market unfolds, I am always prepared.
Where to from here? After moving up strongly to a high of 4984 points earlier this month the All Ordinaries Index has so far slipped away to around 4544 points, representing a fall of approximately 8 per cent from the recent January high and in line with what I would expect for a fall into a yearly low. Interestingly the current decline has effectively wiped out almost all of the gains achieved during December and January, therefore as mentioned in my last report it now looks like we are heading into our yearly low earlier than expected.
While I do not believe the current fall will last much longer, we need to be aware that the market could fall for at least another two weeks. That said there is good support around 4500 points, therefore the bottom may occur sooner rather than later but only time will tell. As always, sit back and wait for the opportunities to come your way, and above all use stop losses.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst