Get Used to This Stock Market Action, It’s Set to Last…

Part of our job as an investment advisor is to recognise a changing stock market.

We need to figure when to buy and when to sell.

And importantly, we need to tell our clients (subscribers to our monthly investment advisory, Australian Small-Cap Investigator) the best way to manage that advice.

Last Friday the market shot up 1.75% to close near its recent high point. This morning it looks set to give back some of those gains. It has been an extraordinary four months as the stock market has gained more than 20%.

So, has the stock market changed? Yes, it has. But not perhaps in the way you think.

And you’ll need your wits about you to make money from this market over the next nine months…

Most investors think a changed market means it’s set to reverse direction.

In other words, if the market has gone up, the next stage must involve the market going down, and vice versa.

And we wouldn’t blame you if you thought that way. Heck, it’s the first thing we consider when a stock appears to have topped or bottomed out.

But there is another option, and it’s one most investors ignore. That’s right, we’re talking about a sideways moving market…

Market Update: Why Stocks Have Stopped Being Stocks

Looking at the current chart of the S&P/ASX 200, it seems clear to us that the index is about to settle in for a prolonged period of sideways movement. Look at the chart for yourself:

Click here to enlarge


Source: Google Finance


We don’t pretend to be a technical analyst. We prefer to leave that to our trading expert, Murray Dawes. He says the market is on the verge of a major breaking point that could see a bloodbath for the stock market.

But there’s no certainty that will happen straight away. The market has a habit of misbehaving and not reacting in the way you expect.

That’s how things look right now. Because the key thing to remember is that the stock market isn’t just about what’s happening with individual stocks. The stock market has actually become an extension of the interest rate market.

That’s why we believe dividend-paying stocks will move strictly on a relative yield basis for at least the next nine months…possibly longer. What do we mean by that?

Simply put, dividend stocks will rise and fall based on whether the market believes the Reserve Bank of Australia (RBA) will raise or cut interest rates.

If the market thinks the RBA will cut interest rates then you should see dividend-paying stocks go up. But if the market thinks the RBA will raise interest rates then you should see dividend-paying stocks fall. And given the recent strong run, it could be a big fall…hence Murray’s warning.

But do you know what? It’s one big game. We’re not convinced the RBA will move interest rates one jot this year…

It’s All a Game for the RBA

Like many experts, we thought there was a good chance the RBA would cut rates this year. But we’ve now realised something. The RBA is playing a crafty game of cat-and-mouse.

It’s trying to do what all central planners try to do – manipulate the economy and the markets.

The RBA figures that if it can use subtle messages to steer the market rather than actually cutting or raising interest rates, then it will leave itself with something in its arsenal if the economy really hits the skids.

That’s why we now believe the RBA will sit pat for at least the rest of the year.

The flipside is that the RBA also doesn’t want to engineer another stock market bubble just yet. Neither does it want to engineer a crash. It would like to see asset prices just plateau for now, hoping for some stability until the rest of the world gets its game in order.

A stable stock market will also take some heat off the RBA for keeping interest rates low. If stocks just trade in a sideways fashion the RBA can point to the market and say, ‘Look savers, you can get good dividends buying shares, and they aren’t too risky either…they’re just going sideways. So stop complaining.’

If you look at the charts you’ll see the same story played out in the US. That was what all the tap-dancing was about with the US’s money printing and bond buying program. It was (and still is) all about manipulating stock prices.

As always, we could be wrong on this. Dividend stocks could soar or collapse today or tomorrow and leave us with egg on our face. But we don’t think so.

The key for investors now is to make sure you understand the game that’s at hand and use it for your benefit. We’ll explain this in more detail, and the strategy you should use for the year ahead, at the end of the week.


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From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Markets and Money: Learn How to Play the Rules Game to Cancel Your Mortgage

Money Morning: Seven Situations to Watch in the Pacific Currency War

Pursuit of Happiness: Freelance Investigator Takes on the Australian Mortgage Industry

From the Archives…

Can This Indicator Predict The Dow Jones Next Move?
16-03-2013 – Kris Sayce

Seven Situations to Watch in the Pacific Currency War
15-03-2013 – Dan Denning

Stock Market Warning: Next Week Could be a Blood Bath
14-03-2013 – Murray Dawes

REVEALED: One Opportunity to Escape Your Mortgage
13-03-2013 – Nick Hubble

UK Property: How You Can Buy a House For Less Than 250 Grand
12-03-2013 – Dr. Alex Cowie

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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