Volumes are down, less people are trading, so is this the time to be waiting on the sidelines or is it time to start thinking about recovery?
While the market has seen its biggest two-day rally since last year, volumes are still down.
On Wednesday 15 July 2009, $3.9 billion worth of stock was traded. Compare that to Wednesday 16 July 2008 where there was $5.7 billion worth of stock traded. That's a fall of 30% in the value of trades.
So where has the money gone?
It's understandable that the market is a little quieter after all the fear that has been experienced over the last couple of years. Yet history tells us that this is the point where we should start being greedy.
After all, if the point of profits is to buy low and sell high, then now should be the time that things are looking low. The temptation is to turn our backs on the market which has punished so many investors, and yet it's sticking with a more risky strategy which is likely to result in better returns.
History shows that generally the return after a downturn is bigger than the long-term average. For example, if you bought into the Australian sharemarket after the 1987 stockmarket crash, a year later the market was more than 20% higher.
The problem is that the big players have left the market. Money pumping into funds is down, which in turn is seeing the big players remaining on the sidelines. So even with the signs of recovery flowing through, there's not much money being pumped into the market.
For smaller investors, it's an opportunity. It means that when money comes back to the market, the market should recover quickly. That's because the majority of people needing to sell out of their long-term positions have already done so.
The downturn in 2007/08 has flushed out the people needing to sell, so as the tide turns towards the positive, quick, nimble and small investors are presented with an opportunity.
When looking to profit from a recovery, remember that a recovery means a shift from defensive sectors such as healthcare, utilities and telecom. These sectors are attractive in an economy that is floundering because people still need healthcare, water, electricity and phones despite a downturn in the economy.
If you are looking to position for recover, don't look to the defensives – look to the growth and cyclical sectors.
Growth and cyclical sectors are usually tied to the fortunes of the economy. Hence, once the economy starts to turn, these are the sectors that will rebound strongly.
Cyclical/growth sectors include:
I would be much more confident buying stocks now compared with two years ago when stocks looked expensive.
We've learnt many important lessons over the past two years. Now it's time to etch them into our trading strategies:
So while many of the big players have left the market, history tells us that they'll be back.
Remember to buy low and sell high. These are some of the cheapest conditions that we have seen in decades.
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Happy investing!
Julia Lee Equities Analyst Bell Direct
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