The great bear market rally we have experienced since early March gives us a great opportunity to take time to reflect upon our investment strategy going forward.
The ASX 200 has been in a downward spiral since mid 2007 (as shown on this monthly chart). I have drawn the Fibonacci retracement levels on the right hand side of the chart, to illustrate key levels that will offer resistance on any move up.
Figure: ASX 200 2003 to 2009 Monthly Chart
Drilling down to the weekly chart you can see the decline in the ASX 200 bottomed around 3120 representing an over 80% retracement from the bull market run from the 2003 trough to the 2007 peak.
Figure: ASX 200 2007 to 2009 Weekly Chart
The market is currently running into resistance around the 3800 level and we would want to see a weekly close above 3850 to confirm a turnaround in market sentiment. My view is that we are experiencing a bear market rally, which typically results in an around 20% recovery and generally lasts anywhere up to 45 days.
Drilling down to the daily chart you can see that an upward trending channel has developed since early March. The market is running in resistance and the key levels to the upside are 3800 then 4000. A close below 3600 would signal the bears are assuming control and the tipping point to trigger a trade to the short side would be a close below 3550. Should this tipping point be broken we would expect a pullback towards 3400 and if that level is broken a retest of the recent low is likely.
Figure: ASX 200 2009 Year to Date Daily Chart
Keys factors likely to impact on market direction in the near term:
- US companies are starting to report their quarterly earnings. This began this week and continues in earnest next week. The focus will be on the forecast earnings.
- International Monetary Fund (IMF) is expected to report that there is $US4 trillion of toxic debt (on 20th April). This must be unwound at some point.
- RBA cut interest rates on April 7 by 25 bps to 3%, however Australian banks are unwilling to fully pass this on to their customers. This indicates that credit and debt funding is still hard to access and the credit crisis is still impacting on the Australian economy and companies.
- G-20 headlined last week that they would back a massive $US1 trillion global bailout package. However the devil is in the detail (as the Obama Administration found with the TARP package). Asset quality and debt levels are not equal among different counter parties.
Call to Action
- Only trade liquid stocks. A buyer s drought can play havoc with your bottom line.
- Only trade stocks with solid balance sheets and positive earnings prospects.
- Take profits as they arise.
- Do not allow your profits from the recent run to evaporate.
- Reduce exposure to more risky assets. Debt and credit quality are key issues.
- Credit will remain tight for the foreseeable future.
- Rebalance your portfolio: only include upwardly trending stocks in long portfolios.
- Consider balancing your portfolio with Long and Short positions.
- Actively manage your portfolio, by introducing option strategies into your portfolio (or simply buy some put protection for your positions).
The bear market rally we have experienced in the past month has been great, but do not get complacent and take this opportunity to replace and protect your portfolio. Our MDS Financial Research report will inform you when it is time to trade.
By Michael Hevern
