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Wednesday, January 23, 2008

Equity market commentary

Dow Jones Industrial Average (DJIA)
As predicted in my previous blog the Dow Jones Industrial Average fell back to 11,650 pts, in fact it bottomed at 11,644 pts, but one seldom picks the exact bottom. More impressive is the volatility in the market.
the market fell some 600 points to get to that mark, then it rose 900 pts to close 299 points higher. Wow
Of course such trading volatility reflects technical trading strategies more than fundamentals. The marker was in a state of uncertainty, and it needed a 'firm peg' to cling to. The 11,650 level was a very firm support for a scared market. Expect the market to rally from here. You can expect some re-ratings under the headlines "Economy stronger than expected", "Profit upgrades" and just general market buoyancy due to bargain hunting. In the medium term (6mths), I see the market going for another rally, though I think it will have some difficulty breaking 13,000 pts. Broad market stocks will effectively consolidate, whilst people will be piling into resource stocks. Gold and silver stocks will particularly shine. Why? Well gold has risen from $660/oz to $900/oz over the last year, but with commodity currencies even weaker, the gold price in $A terms for instance is over $1000/oz. So earnings potential has more than doubled. Gold stocks were over-sold because of the falling confidence of foreigners selling $A denominated assets, but expect that money to pile back in. I do see some trepidation though because of the household debt over-hang in Australia. But I dont see a $US0.66 exchange rate as predicted by a major investment bank. Not for a while yet.

Nikkei-225 (Japan)
The markets have been very volatile of late. The Nikkei is falling c
lose to a major support, so seems likely to rally from that point. The bottom I see as around 12,100 pts, though the market has until now fallen to just 12,550 pts. I suggest that there is scope for further weakness, but I think this support will hold. It will take time for confidence to be restored, and after traders take profits today, the market will all once again, but a base will be established. As you can see from the chart to the left, the 12, 100 support is a strong support.

The All Ordinaries Index (Australia)
The Australian All Ordinaries Index - has also followed the general volatility and malaise experienced in other markets. The index fell to 5243 points - exceeding my expectations by 50-odd points, but nevertheless recovered to close at 5549 pts. As a consequence the index has found the support of a major support level, and recovered quickly. In coming days I expect some consolidation after profit taking.
I dont expect a great outlook for the broader market, but I do expect confidence to be buoyant in the mining/resource sector because of:
1. Resilience of metal prices - strength in gold/copper prices
2. Weakness in the $A
3. Prospect of Chinese investment in the sector - maybe even a few Indian, Swiss investors
4. The long term prospects for the sector


See My Speculators Dream and Blue Chip Equities blogs for suggested market buys.


Andrew Sheldon www.sheldonthinks.com
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