Online Stockmarket Trading Update

The Case for a Market Rebound

Stocks markets worldwide have pulled back significantly in the past quarter. This pull back has presented investors with opportunities to buy stocks that have been significantly oversold and now represent good value. Trades are setting up with a good risk/reward opportunity and we have seen traders step into the markets over the past couple of days. This is setting the markets up for a bounce in the near term.

Last week we reviewed the seasonality of the market in an attempt to give investors a potential road map of what to expect in the markets over the next quarter. This review was carried out using seasonal analysis of 26 years of ASX data. Our Education Manager Jeff Cartridge concluded by saying “July and August look much stronger from a seasonal perspective” and provided some strategies for hedging your portfolio.

How to Profit from a Rebound

This week we look at the case for a market rebound and identify some strategies to profit if a rebound unfolds.

Stock Market Analysis Overview

In the past quarter we have seen stock markets worldwide fall around 6%. China and the U.K were among the worst performers, down 22 percent and 13.5 percent respectively.

Markets continued lower earlier this week after the U.S. reported disappointing employment data and there were reports of ongoing concerns over European sovereign debt. Asian investor sentiment was also hit by concerns of a halting Chinese economy.

Europe – Finally Some Clarity on the Banks

As the week has unfolded we have been given some clarity over the European Union (EU) banking regulatory reviews. The EU regulators have confirmed they will carry out their “stress test” on 91 banks which include 14 from Germany, 6 from Greece and 4 from the U.K., accounting for 65 percent of the area’s banks. The test will review whether the banks could withstand a shrinking economy and a drop in government bond values (assuming a 17 percent loss in the Greek government debt and 3 percent loss on Spanish bonds). The results will be released on 23 July on a bank-by-bank basis. This news appears to be giving European investors some reassurance in the near term.

Asian Markets – China’s “Steady” Slowdown

The key focus in Asia has been China where the markets have pulled back and growth is slowing. The Shanghai Composite in China is the world’s third worst performing equity market this year losing 28 percent. The Chinese economy is undergoing slower growth, however it did expand 11.9 percent in the first quarter which was the fastest pace in almost three years.

Earlier this week the Chinese Premier Wen Jiabao reassured investors by saying that China will maintain a policy of continuity and flexibility to ensure a “steady and relatively fast” growth and to balance the growth of management of inflation expectations and economic restructuring. Even though Chinese economic growth is slowing it is still running at an annualised GDP growth rate of 10 percent, and with the pullback in their market’s value investors are starting to see opportunities.

ASX Market Overview

The Australian market continues to surprise to the upside. The main drag on our market last quarter was the proposed resource tax. The breaking news this time last week was the resolution of the Resources Super Profits Tax (RSPT). The new tax is a watered-down version of the original proposal and has been renamed the Minerals Resources Rent Tax (MRRT). This is a positive for miners, even though they will be paying more tax than they currently pay.

The resolution of the RSPT has given clarity for miners and has stimulated Merger & Acquisition activity.

M&A is again in focus with deals worth around $5 billion announced on Monday for Centennial Coal and CSR Limited. Miners are also revising “canned” projects with Xstrata saying that they will be spending $186 million to restart early works and exploration projects in Queensland.

Australia has posted its biggest monthly trade surplus ($1.65 billion) since March 2009 on the back of high gold, coal and iron ore prices. This surplus significantly exceeded analysts’ estimates of $500 million. Imports rose 4 percent while exports jumped 6 percent for the month.

The unemployment report out yesterday showed that unemployment is down to 5.1% (from 5.2% last month), with 45,900 new jobs created last month. This is the lowest level since early 2009.

The International Monetary Fund (IMF) has also upgraded its 2010 global growth forecast to 4.6 percent (from 4.2 percent), citing robust expansion in Asia and renewed U.S. private demand, but it has warned that the EU debt issues pose a big risk to recovery. It expects the Asian regional economy to grow 7.5 percent in 2010 (up from 7 percent).

The Trade

Trade with momentum and monitor the performance on the Chinese and NASDAQ markets and the Euro dollar. These markets will give an early warning of any potential failure in the recent short term bounce.

The pullback in the markets has given us a good opportunity to trade for a turnaround. On a risk/reward basis we can trade using a well-defined stop, just below the two-week lows. Before entering into any long position make sure that the stock price is trading above the previous week’s close.

By Michael Hevern
Head of Research

The information provided within this blog is general advice only and you should consult the services of a financial professional in order to ascertain whether the information is applicable to your investment strategies and risk profile.