Confidence is a funny thing. What are the Stock markets doing right now and why?

Stock MarketsThe world’s stock markets are running – Pamplona style, with the bulls.  Money has been pouring back into the market for about 6 months now.

Much has been pointed toward investor confidence increasing, and the outcome of that confidence has been a return to stock markets.  According to the bastion of all knowledge, Wikipedia, Confidence is generally described as a state of being certain either that a hypothesis or prediction is correct or that a chosen course of action is the best or most effective.

Having positive news, which has been in short supply over recent years, as well as diminished returns from alternative investments (cash rates are very low and practically zero on a real basis) has really forced the hand of the trigger shy investor back into the market.

Stock markets are a funny thing – they can be a reflection of confidence than fact – “buy the rumour, sell the fact” being just one of the many cliché’s that we often hear.

Confidence in this case is that markets are moving (more than just rumour) and we need to be part of that move.

News has been more positive – the US Election is past, the Fiscal Cliff has been managed (according to a couple of heavy hitting Wall Street sources).  In Europe, things have settled down, not fixed (I’m not sure how fixable, long term some of the issues in the Mediterranean are).  China has slowed, albeit to a growth rate of 7% (who wouldn’t want that right now).  Iron ore prices are back up above $140 a tonne.  Consumers are beginning to get their wallets back out.  Housing clearance rates appear to be gaining momentum at auction. ANZ, BHP, Telstra and Woolworths, giving a broad slab of the market, have respectively gained between 24 and 30% this financial year.

For those that “took off some bark” in 2008 and 2010, the only way to have an opportunity to get that “bark” back is to get back in – just watching and waiting wont do it.  Of course, while there are risks, as there always are, these do need to be managed either on a trade by trade or broader portfolio basis.

The RBA’s decision to slash rates, in such an aggressive manner could be argued for many reasons.  It certainly has gone a long way to pumping (reflating) a flailing economy. However, such a swift and sharp series of cuts and the impact this could have, over the coming months, may well provide a fertile investing and trading environment.

Do not discount the prospect of an “unexpected” rise in inflation.  Over previous articles, we have shared our view that real underlying inflation is probably higher than the official rate of 2%.  The flow of money back in the economy is likely to give added momentum to both the economy and the inflation rate.  If you are sceptical of that view, ask yourself why the Australian Dollar is still trading at 103 plus vs the US Dollar in spite of the swift and sizeable cut in rates.  The RBA’s minutes, released this week, point toward a significantly higher threshold for further rate cuts.

Looking at an election in the coming months, it would also be uncharacteristic for a Labour government to be voted from office, without leaving behind a legacy of high levels of debt, a slow and slowing economy together with rising inflation.  Cynicism aside, this may sound like a fairly accurate description of what the next six months have to offer, and with a further $1bn this week pledged towards the job market/vote buying (delete as applicable) this can only add further inflationary pressure.

Now this is not necessarily bad news.  Please bare in mind that during times of higher inflationary pressure, real assets – property, shares, gold and other commodities – tend to run up. As such, look on this as a further support for the stock markets – one which I hope you profit from.

One of the best summaries of successful trading is to be able to join the dots between news, events and information to be able to make a trading decision on the back of it.  With a raft of more supportive news, growing investor confidence, lower rates and the potential for inflation, this is why the stock markets is going up.  Which leaves only one decision for you to make – how are you going to profit from it?

Here is one way – register here if you would like me to make this easier for you.

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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