Why Stocks May Not Move
Higher Following Earnings Season
Everywhere we look there seems to be a property connection, even the US GDP numbers are said to have been negatively influenced by slowing investment in US residential property.
This morning we’ve been feverishly finishing off the August edition of Australian Small Cap Investigator. In fact, if you’re a subscriber, there’s a chance you’ll get it even before this newsletter gets to you.
In some ways, the current market conditions make it harder to pick stocks than when the market was hitting lows in November last year and then in March.
Even though we didn’t know for a fact that it was a low point, picking stocks was a lot easier. Especially small caps.
When you’re investing in a market as high risk and volatile as the exchange’s little tiddlers, the extra volatility suffered by the rest of the market was nothing new. It’s what we’re used to at this end of the market.
That means, when you’ve got small cap stocks getting beaten down to bargain basement prices, you know they can’t go much further - or you hope they can’t anyway.
Then it’s just a case of picking out the good ones. Of course, it’s not quite as simple as that, you’ve still got to know what to look for.
As you know, the market is always looking ahead. Back then it was looking ahead and seeing the worst. When that’s priced into a stock it makes the stock even cheaper than it should be.
Now, the market is looking ahead and it’s seeing nothing but happiness.
It’s why the main index is up over 30% from the low. So now, when you’re picking stocks you’ve got to work out rather the move is justified and whether there is still room to move higher.
That’s the case with all stocks, not just the small caps. You can see by looking at the chart below that after the big run from July, the market appears to be settling into another consolidation phase:
It would be easy to think the move from early March to today has been smooth. But another look at the chart tells a different story. In fact between the beginning of April and the beginning of July the market just about broke even. Then it took off again.
But that’s all part of the game. There’s nothing particularly scientific about it. It purely means that between April and July investors as a whole considered the rally to have run its course, and perhaps there was some caution as earnings season approached.
As can happen, when company earnings started coming out better than expected it gave the market a reason to buy stocks again. That’s pushed the market higher.
Now earnings season is mostly over, the market will need to look for other reasons to move higher. If none are found that’s when you’ll see a sideways consolidation.
Still, the market has put on about 200 points since it dipped last week. And this morning it’s edging higher again.
But whatever happens, trying to make specific long term predictions about a level for the major indices is doomed to end in embarrassment for those that try. So we won’t be tempted.
The S&P/ASX200 fell 0.08% yesterday, while on Wall Street the Dow Jones Industrial Average added 37 points. In Europe the FTSE100 slipped 0.43% and the CAC40 dropped 0.54%.
The price of gold in Australian dollars is trading at $1,133.24, while in US Dollars it is trading at $950.79.
The Aussie dollar strengthened slightly versus the US dollar and Japanese Yen, trading at USD$0.8394, and JPY78.57.
Crude oil traded this morning at USD$72.74