What a rally! But is it sustainable?

March 26th, 2009  by Peter Spann

Closing Data

	current	change	%
Dow Jones	7749.81	89.84	1.2%
NASDAQ	1528.95	12.43	0.8%
S P 500	813.88	7.76	1.0%
FTSE 100	3900.25	-11.21	-0.3%
Nikkei 225	8479.99	-8.31	-0.1%
SPI Futures	3623	21	0.6%
All Ords	3,550.80	4.6	0.1%
Oil	52.24	-1.12	-2.1%
Gold	935.8	12	1.3%
Silver	13.437	0.08	0.6%
Aluminium	1370	-33	-2.4%
Copper	3911	-95.5	-2.4%
Lead	1251	-90	-6.7%
Nickel	9625	-190	-1.9%
Tin	10355	-245	-2.3%
Zinc	1222	-33.5	-2.7%

Hello,

What a rally!  But is it sustainable?

Of course that is the million (or billion) dollar question.

At the beginning of this year I said the share market would get a “bump” leading up to the end of the (US) financial year, however I was expecting this to be more gradual.  Rarely do share markets go up rapidly without correcting and this is the concern with this rally.  It has been so swift you have to question it’s sustainability in the short term, so more likely than not we will get a correction again before any possible sustained upward trend.

That’s not to say we can’t take advantage of the swings – just be cautious about being too “long” (committed to shares without hedging) too quickly. 

With regards to options expiry today, many of you, including myself, will be left with positions in the money and facing the decision of whether to roll the position to April, or let it exercise.

With the market appearing to pause and prepare for another move, it is the direction that is the question. The way I see it the market could either move up from here towards 3800 resistance, or pull back from here towards 3400 where I would expect some consolidation.   If it holds above 3800 we may have a decent rally on the way.  If not, a sideways trend between 3400 and 3800 is most likely in the short term. 

Either way, I do not see it as being in my best interest to roll positions that are so far in the money that it would have to be done at a loss. If the market climbs from here I am in an even worse position because I would have paid to roll this month only to be in the same position next month, while if the market pulls back, I will be able to buy back in to these or other stocks at a better price, and for a better long term outcome.

Given this, I will be allowing several of my positions to exercise today. By allowing the stock to be sold and moving the funds into cash, I will be able to asses the situation and decide on waiting for a pullback or opening new positions for April. My view is that over the coming days we will be able to better conclude the next direction of the market, and position ourselves to be profitable in April.

If you believe the rally is more sustained and are concerned about missing out, you could take a small quantity of calls to “cover” you cash position on the upside.  Of course the risk is 100% of the capital you commit to this strategy, but as long as you don’t go too hard it could be a very interesting counter-intuitive strategy. 

Obviously, everyone is different and your individual circumstances will vary, please get in touch with your broker, if they have not contacted you personally to discuss this further.

Sincerely,

Peter Spann

 

Market Fox

 Markets rallied late overnight, led by the banking sector which dragged the broader index into positive territory on the close. The Dow closed up 90 points. The session began well with better than expected housing data that showed new home sales were up by  nearly 5% in February (the fourth piece of better than expected housing data  in the past month). Adding to the momentum was the Durable goods orders which also came in better than expected, while inventories continued to decline for the month. Following the strong start to the session, gains began to peel back, and took the index negative. This was as a result of ongoing fears of borrowing costs for the U.S Government  as well as the fact the Government’s 5 year treasury auction did not go as well as expected. The market then rallied 150 points in the last 15 minutes to close in positive territory, led by the banking sector and the tech stocks following  an announcement by IBM that they will be slashing 5000 jobs.

Base metals were broadly mixed, which could keep the local miners steady when they begin trading this morning. Oil shed  a little over 2% following the release of Oil Inventory data  that showed an increase in stockpiles of 3.3 million barrels over the past week. It is, however, important to keep the slide in the Oil price in context with the dramatic rally over the past month, surging some 25%. Oil closed down 1.12 at USD 52.24 per barrel. This may spark a degree of profit taking in the likes of Woodside Petroleum, Oil Search and Santos on the local market this morning, given the steep rallies over the past month in each of these.

Precious metals climbed, with Gold up USD 12 to USD 936 an ounce, which should flow through to the Gold miners today.

The Australian Share market looks set to pause today, with the SPI pointing 15 points higher on the open. The rate of the rally on the global indices has been dramatic and caught a lot of investors off guard. The Rally appears to be losing steam over the past few sessions, and this looks set to continue today. The big question is whether after a pause in the rally we will have another leg higher or profit taking will take hold and drag the global indices lower?

Cale McCulloch

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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