It's the old Chicken Little fable: "The sky is falling down." The truth is that sharemarkets go up and sharemarkets go down. It's just normal market behaviour. Unfortunately, it's difficult to be that unemotional when it's our money on the line.
We are currently in a stage where the market is neither strongly up nor down but essentially going no-where. The market (and by the market I mean the benchmark S&P ASX 200) has been bouncing around between around 4800 and 5150 points.
Let's have a look at what that means.
This phase of the market is often called consolidation. Consolidation is often thought of as 'truce time', when buyers and sellers are at a truce as to who is winning. If buyers are winning, the market will move up and if sellers are winning, the market will move down.
At the moment, neither is winning so there's a truce or a consolidation phase. Generally, the longer that the truce goes on, the bigger the breakout will be when it happens.
The good news is that it tells us that the market is getting ready to move.
The bad news is that we don't know whether it's going to be a strong move up or a strong move down.
Here's an example of consolidation in KZL, Kagara Zinc back in September 2007 before a breakout to the downside.
Now, back to the market…
To figure out the direction of the move, I look at fundamentals. If we have a look at what is worrying the market at the moment, it's the very real possibility that the world economy is slowing down. If growth slows down, then companies/stocks are going to find it harder to make profits and investors will not be willing to pay as much for the companies/stocks.
Globally, the US housing market is showing no signs of bottoming.
Why is this important?
It's important because as long as there as problems in the US housing market and house prices are falling, consumers are less willing to spend, the banks have a difficult time due to defaults and devaluations and US stocks continue to fall. The problem is that this is no longer confined to the US but has now contaminated the UK, Europe with a potential recession and most of the Western world suffering.
In Australia, while we have seen a very sharp downturn in the market, part of our market —namely the resource area — has buffeted our market against extreme falls. The resource sector is now under pressure due to concerns about global growth slowing and with it the demand for commodities.
That's bad news for investors and probably signals that the break is likely to be down.
So time to batten down the hatches and then hang on for the ride.
Personally it's times like these that I rub my hands in glee. Not because billions of dollars are being wiped from the market everyday but because I know that I'm getting closer to the best investing opportunity of a decade for my personal portfolio.
I still remember the days when I picked up BHP at $8.80 and CBA at $25 and I hope that I get a second chance to profit from the pessimism in the market and the normal market cycle of going up and then coming back down.
Happy investing!
Julia Lee Equities Analyst Bell Direct
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