From 2007 to late 2008 it would be fair to say we were bearish on the markets. That means we thought there was a chance stocks would fall.
Although if we’re honest, they fell much further than we expected.
From late 2008 to late 2009 we were bullish. From that point on until early 2012 we were largely neutral to bearish again.
Since early to mid-2012 we’ve had pretty much one thing on our mind – a raging bull market for stocks. And while many seem to think the bull market glory days are over, we’re in no mood to agree.
In fact, despite the volatility and the bearish market atmosphere, we still say that stocks are heading in one direction over the next 18 months, and that’s up…
That’s not to say there won’t be some bumps along the way.
There’s still a chance that the US government will default on its obligation to pay interest and principal on its bonds.
While a default would be good in the long run, in the short term it would have a big impact on the markets. Remember that US government bonds affect the prices of all securities worldwide.
That’s because investors see US government bonds as a risk-free investment. Every other investment such as bonds, stocks, and mortgages has its price in some way determined by the US bond price.
The Next Rally Could be Just the Beginning
There’s also the question of whether new US Federal Reserve chairman, Dr Janet L Yellen, will continue to print money and buy US government bonds.
Many think it will be business as usual under Dr Yellen. To your editor it’s a no brainer. There’s no way the Fed will halt a policy that has helped boost stock prices to a record high.
This is why we’ve set a price target of 6,000 points for the S&P/ASX 200 by early next year, and 7,000 points in 2015. If we’re right and the market gets there then anything is possible after that. In fact if the market really starts to bubble you could see stock prices reach 15,000 points by 2017.
We’ll admit it’s an out-there call. But similar sized increases have happened in the past. The Australian stock market doubled from mid-2004 to late 2007. That was just over three years:
Source: Google Finance
So is it really so crazy to think stocks could do something similar over the next two to four years?
Remember that the Australian market is only up 65.6% since the March 2009 low. So it’s not as though the market has exhausted all its potential gains. Although as we mentioned in yesterday’s Money Morning, a selection of Aussie blue-chip stocks have performed much better than the broader index.
Bear Market Trades in a Bull Market
But despite our talk about stocks going up, it’s important to remember that we’re not a cheerleader for the stock market and the current state of the world economy.
We understand there are problems…big problems. But we also understand that this is exactly the type of market where you can make some serious money.
Of course, not everyone agrees with our view. There are still a lot of bears saying the market is set to fall. But so far it has been a tough year for most bearish hedge fund traders. Although some bears have done better, such as our old pal Dan Denning, who has helped his readers make money without short selling stocks.
The reason the hedge funds have gotten it so wrong is that they’ve tried to short what has been (so far) a gradually rising market.
Source: Google Finance
It can be hard to make money short selling at the best of times. It’s even harder when stocks keep going up despite the worsening macro-economic outlook.
But to make matters worse it seems the short sellers may have been the victims of their own actions. As the Bloomberg report notes:
‘The embrace of bearish trades has squeezed returns for professionals and is one reason stocks have repeatedly rallied in 2013 amid slowing economic and profit growth, according to Cambiar Investors LLC and Pension Partners LLC. Rather than falling, shares that investors have shorted the most are up 38 percent since January, a consequence of forced buying during rallies by speculators who borrowed and sold them, data compiled by Goldman Sachs Group Inc. show.‘
So not only have the stocks short sold by hedge funds not fallen, but those stock have almost doubled the performance of the S&P 500 during the same timeframe – which is only up 21.9%.
Talk about a kick in the guts.
Crash Alert Set to High, but We’re Still Buying Stocks
And doubtless last night’s market action has given them another kick. With all the talk about the US budget and debt ceiling talks still up in the air, it would have been reasonable to think stocks would fall. But they didn’t. They closed the day up 0.4%.
The tech-heavy NASDAQ index did better, gaining 0.6%.
Even so, we’ve always got our crash alert set to high. We’re always looking out for excessive bravado. (Maybe our own claim about the market hitting 7,000 is excessive bravado and should be a warning in itself!)
But there is a difference. We get it that the world economy is living on borrowed time. Most in the mainstream still don’t quite get it. More from Bloomberg:
‘“There still are people out there who are convinced the whole market and financial system is some house of cards,” said Brian Barish, president of Denver-based Cambiar Investors, which manages about $8 billion, said Oct. 10. “I think they wind up shooting themselves and their investors in the foot with the permabear mentality, but it persists.”‘
That’s the voice of someone who doesn’t get it.
That’s the voice of a financial advisor who probably has most of their client’s money invested in stocks without any thought that stocks could crash.
As for us, despite our call of the ASX hitting 7,000 we’ve still got a level head when it comes to investing. We know that you can make a lot of money, but we also know it’s risky.
Our bet remains that the US deadlock will end within days. Providing you understand the risks, our view is that you should use the current price weakness as an opportunity to buy stocks. Once the US politicians reach a deal it could signal the start of the next rally.
Cheers,
Kris+
From the Port Phillip Publishing Library
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