THINKING OUT LOUD

Feb 2015 Newsletter

See The Forest For The Trees

February 17, 2015

by Rob Zdravevski

In this edition of our newsletter, I’m going to try a change to format. More bullet points and less essay.

Over the past 3-6 months;

  • The U.S. stock market has traded is a sideways range,
  • defensive stocks (pharmaceuticals, food staples etc.) have seen positive capital flows & performed well,
  • the US Dollar has risen and developed a strong bull market,
  • the Aussie, Yen, Euro, British Pound, & Loonie have weakened,
  • as have commodities, the oils and their related stocks,
  • this means we were seeing a macro economic deflationary trend developing,
  • and increasing volatility in all asset classes.

This has been the main macro economic trend over that time.

I think that over the short-term (the next 3-5 months) we are close to seeing a counter-trend to this develop.

Lately;

  • QE is Europe means their stock markets are poised to go higher,
  • a weaker Euro makes their companies more competitive than in the past few years,
  • European equities are looking really bullish and,
  • a strong stance against Greece will solidify the Eurozone’s seriousness,
  • a departing Greece won’t matter in the larger scheme of things,
  • thus other countries will think twice before testing the EU system.

Now;

  • Coupled with the Euro QE program and the bullish setup of their equities markets,
  • the S&P 500 has broken its December 2014 high of 2,093 and is poised to rally higher,
  • especially good for cyclical stocks,
  • it’s too early to confirm, but probability has increased that the “deflationary” trend of the past 3-6 months has reversed,
  • so watch for a rally in the commodities, oils and other stock markets (incl. Aussie equities) too.

Future;

  • If this current setup is seen & confirmed as a trend reversal,
  • equites will rally further and the S&P tests the 2,180 mark,
  • you’ll see a rotation of money from the defensives into the cyclical stocks,
  • a pullback in the US Dollar should occur,
  • and a short-term rally in the commodities, their underlying currencies (AUD, CAD), oil and their related stocks.
Thus the correction in equities that I was anticipating has been pushed back into the May/June/July 2015 timeframe and you’ll have to wait longer to buy stocks at cheaper prices, but be careful chasing any short term rally without good foundation for why you are doing it.
Be cognisant of the powerful investor condition called the “Fear Of Missing Out” – FOMO.
  • In the interim, caution is warranted on a broader market perspective,
  • the recent 3 year advance in the S&P 500 is showing signs of extremes in terms of;
  • weakening volume (breadth), earnings growth, deteriorating amount of stocks trading above their 200 day moving average etc etc,
  • so any broader advance is not rooted in cheap valuations and contrarian.

Any near-term bounce in commodity stocks is correcting its recent downtrend and we expect to see a better multi-year buying opportunity in commodity stocks later on in 2015.

This also means we expect a lower level in the AUD and in oil (and inversely a higher USD) before completing its bottoming process.

Currently, it’s a momentum and capital flow market.

If we see a sharp and swift correction in the middle of the year, this should scare off market newcomers and in part, correct part of the advance that we have seen in the S&P 500 since 2011.

In other words, from a broader equity market perspective, with the S&P 500 is now 2,093, I’m looking for a 4% rally up to 2,180 region lasting into the June/July 2015 window, then I’m expecting a 15% correction back to at least the 1,840 mark,

keeping in mind this would bring the index back to levels seen in April & October 2014.

A move to the 1,700 – 1,680 region would an extreme call as this would be a 22% decline from my predicted top.

Even after all this, the structural bull market in equities would still be intact. I then anticipate prices are heading higher into the First Half of 2016 where I look for a S&P 500 target of 2,350/2,400.

After of all this crystal ball stuff, individual stock picks and quality companies still matter the most when we are investing money for our clients.

There is always something to do.

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

To read about our thoughts and how we do business, please visit the blog, www.robzdravevski.com or our company website, www.karriasset.com.au

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