Who is brave enough to say the market has bottomed? We are. We do it with the full knowledge that once it is in print – or in this case online, it cannot be retracted.
We also do it with the knowledge that there are about a dozen eggs ready to be flung at your editor’s face if the market heads under the low point of 3217 points reached in November.
The dangerous thing about predicting the bottom of the market is to decide why this most recent four-week period is different to any of the other recent periods of market consolidation.
Take a look at the chart below of the S&P/ASX200. Since the market started to slowly fall of its perch in late 2007 there have been at least four occasions when it began to trade within a sideways range.
Each time, the market has fallen significantly once it broke out of the range.
So, why is this current period any different? The first response is, maybe it isn’t. Maybe there will be another catalyst that will send the market down further.
There are a bunch of things that could do that. In the resources sector we are seeing Chinese companies pulling out of contracts left, right and centre. Some resources companies are mothballing mines are even folding.
In other industries there is the fear that a drop in earnings will mean a cut to dividend payments. A quick look at a supposedly safe sector like utilities paints a pretty dire picture for dividends.
The only utility that looks in reasonable shape to maintain dividend is AGL Energy [ASX: AGK].
Which is extraordinary, considering that at a time of market instability, utilities are typically one of the sectors many investors would look to. Why? Usually because they have a relatively high pay-out ratio and because gas and electricity are in demand even when the economy slows.
Of course, one of the problems for investors now is that over the last five years, utility companies have been snapped up by the over-leveraged infrastructure funds. Funds that liked the stability of the dividends, yet also believed they could grow these traditionally income oriented investments.
I don’t need to go recover old ground to explain what has happened to those infrastructure funds recently. A quick scan of the Babcock & Brown portfolio is illustration enough.
However, despite this I continue to believe that we are now in the phase where news events will be specific rather than generic. What do I mean by that? Well, much of the bad news over the last four months has been based on broad fears of various risks – market risk, credit risk, systemic risk, etc. – and the fear of a slowing economy.
Those events are most likely already priced into the broader market. What may not be built into share prices is company specific events. A perfect example would be last week’s mess caused by the Commonwealth Bank [ASX: CBA] over its debt exposure.
This caused the share price to fall by 11%.
And there will probably be other instances of companies reporting news that disappoints the market.
Yet there will also be instances where the news cheers the market. It is in times like this when the smallest amount of good news can provide a fillip to even the most down-beaten of stocks.
If you’re brave enough to dip back into the market now you may very well be sitting pretty this time next year. You have to decide if it’s a risk worth taking.
On that note, Merry Christmas and a Happy New Year.
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