By now you’ll know we’ve been vocal in predicting a big rally for stocks.
Our bet is that low interest rates will cause investors to keep dumping cash and invest in stocks instead.
As investors rush to buy stocks, this will lead to rising share prices. And as always happens in a bull market, rising share prices create a positive feedback loop that results in even higher share prices.
Sounds like a no-lose situation right?
Not quite. Investing is never that easy. So, with the S&P/ASX 200 still 1,766 points away from our 7,000 point target it’s time to check on the progress of our big prediction…
Yesterday the S&P/ASX 200 closed at its highest point since June 2008. And it’s barely a handful of points below the intra-day high reached in May this year.
Click to enlarge
Source: Google Finance
Over the past year the Australian market has gained 21%. That’s a good return by anyone’s standards – providing you were brave enough to stick with it.
As you can see from the chart, it has been a volatile year. After the peak in May the Australian market dropped more than 10%. It had many investors running scared fearing another crash.
But as you know, we didn’t flinch from our course for a minute. We hope you didn’t either. We assured you that if you could stick with it, the market would soon recover. We even suggested you ‘scale in’ to stock positions if you felt a little nervous (that means buying one-third or one-half of your position size and then buying another third or half a week or so later).
The Aussie Market Has Come Around to Our Way of Thinking
So as far as our target of 7,000 points for the S&P/ASX 200 by 2015 goes, despite the volatility things are going to plan.
From a psychological view it was important the index stayed above 5,000 points. It has managed to do that (so far).
The next key level is somewhere around the 5,249 level. That was the intra-day high in May. These levels are important because above here there are few key technical points that could put a break on the market’s advance.
Since late 2008 the Aussie market has tried to break through this ceiling seven times. Each time it has failed. The most recent attempt was in May.
Now, this isn’t to say that all the market has to do is go above 5,300 points and it will be plain sailing from there. Anything can happen to put the kybosh on a stock rally – including any number of macro-economic events that tend to crop up from time to time.
But so far things are looking good.
And dare we say it, it seems the market has come around to our way of thinking on the US Federal Reserve’s plan to ‘taper’ its bond-buying program.
For most of the past four months the market has fretted about the Federal Reserve’s plan to ease back on its bond-buying program. The impression most investors seem to have is that if the Fed tapers it will cause interest rates to rise.
We’ve taken a different view. Our position is that whatever the Fed does with its bond portfolio, it won’t lead to a meaningful rise in interest rates.
That’s not to say that rates won’t ever rise, because they will, but not in the short term. And the same goes for Aussie interest rates.
A Big Gain Like This Has Happened Before
So, from here Australian stocks need to gain nearly 1,800 points to reach our 7,000 point target.
That means a 33% gain in less than two years. We’ll agree that in the context of the past few years of market action it’s a tough ask.
But if you put it in the context of a bull market in stocks it’s not such a crazy idea. And it has happened before.
The Australian stock market was right around this level in October 2006. Just one year later the market hit its all-time peak above 7,000 points. Sure, it was a different market back then.
The China commodities boom was in full cry. But in a way, today the market isn’t that different. The stimulus for the market in 2006 was China. Today, the stimulus is low interest rates.
It has caused a boom in overseas stock prices, and if the Fed continues its low interest rate policy that boom will continue.
There’s no doubt in our mind that will happen. If we’re right, then as risky as it may seem, it’s still not too late to buy stocks as the market edges closer to our 7,000 point target.
Cheers,
Kris+
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