The Market Rebounds, but We’re Still Not Selling…

The S&P/ASX 200 closed on Wednesday within a sniff of the March high. It was just 44 points short.

Does that mean you should dump your stocks before the market falls again?

No. As we’ve noted over the past two months, this isn’t a market for selling stocks (with one exception that we’ll explain in a moment). Rather, it’s a market for buying stocks.

In other words, over the past month and for the rest of this year you should either be a buyer, or a non-buyer…

But not a seller. Here’s why…

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.

Last week the market rallied on news of lower than expected inflation. Investors believed this could allow the Reserve Bank of Australia (RBA) to cut interest rates.

The RBA will be quite happy for the market to think that…for now anyway.

But with the market getting close to the recent high again, don’t be surprised if the RBA starts making noises in the opposite direction. The report from property spruikers RPData, claiming that house prices are set to double over the next 10 years could be just the excuse the RBA needs to talk up the prospects of a rate increase.

That would see the market slip again, towards the bottom of the trading range. At that point the RBA would allow talk of an interest rate cut to push the market back up again.

And so on, and so on. If you don’t think this is likely, just look at the RBA statements. And look at what central bankers have done overseas. It follows exactly the same pattern.

That’s why we don’t believe you should sell this market, with one exception…

If Your Strategy is Wrong, Change it and Move On

That one exception is where you’ve followed the wrong strategy. We admitted that with a small number of stocks in our monthly investment advisory, Australian Small-Cap Investigator.

We had made a few energy sector picks between 2011 and 2012. One to two years later and it had become apparent the strategy wasn’t working. As much as we’re excited about the prospects for the energy sector, the market isn’t. So three weeks ago we advised our subscribers to halve their exposure to energy by selling five of the stocks.

It’s hard to admit when you’re wrong. But sometimes you just have to bite the bullet and move on to better opportunities. We’ve done that. Besides, we still have some exposure to the energy sector, so if the market regains interest then our subscribers can reap the rewards.

But aside from that kind of portfolio restructuring, we still say this is a great time to own stocks. Do we think you should add to your share portfolio today?

It depends which stocks you’re talking about. Dividend stocks have rallied since the start of the week. We hope you already have a good exposure to dividend stocks. You should, because we’ve told you for more than two years to own them.

But buying them now as the market nears the March top may mean you’re not buying at the best value. And if we’re right about the RBA manipulating the market lower, you’ll get to buy them a bit cheaper in a few weeks anyway.

We can’t say the same for growth stocks. They keep getting a beating. And when many growth stocks are closer to their 52-week low than their 52-week high, it’s hard to say they’re expensive. In fact, growth stocks have taken a double beating. Not only did they miss out on the recent rally, but they’ve fallen the most as the market falls.

That doesn’t mean you can’t make money from growth stocks now. Our old pal, Murray Dawes reckons you can ‘slipstream’ profits from growth stocks in any market. Find out how here.

Just be aware that if you’re a longer term investor, the market still doesn’t favour growth stocks. That will change at some point. But right now, investors still want yield. There’s no telling when the demand for yield will end.

Don’t Miss the Growth Rally When it Comes

Our bet is that it could last until the end of this year. At that point the big institutional investors will get bored of 5% or 6% dividend returns. That’s when you’ll see a return to growth.

And that’s why we’re sticking by our medium term forecast of the Australian market hitting 7,000 points and the Dow Jones Industrial Average rising to 20,000 points by 2015. Dividend stocks can help the index get part of the way there, but not the whole way. In order for the market to get to that key level growth stocks will need to pull their weight.

While we don’t believe the growth rally will take off for another few months, we’re positioning Australian Small-Cap Investigator subscribers for it now. Because like the dividend stock rally, it’s likely the growth stock rally will happen in the blink of an eye.

So if you don’t prepare for it in advance, you’ll likely miss out on the best gains.

Cheers,
Kris

Join me on Google+

PS: Many investors lack two crucial things. They want to aim for the big prize without doing the hard yards first. That’s no way to build wealth. In today’s Money Morning Premium I explain the two key traits all investors need, and some simple advice on how to grow your nest-egg with minimal risk…click here to upgrade now.

From the Port Phillip Publishing Library

Special Report: TORRENT SIGNAL 3

Markets and Money: Lest We Forget

Money Morning: Is This the Last Hurrah for the Australian Dollar?

Pursuit of Happiness: Booze, Watches and Fancy Pens — the Alternative Retirement Plan

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks


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 Port Phillip Publishing, 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.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia