As we launch into 2011, the malaise of Christmas, credit card statements, a return to the office all culminate in easy case for making January a month of just getting back into the groove and not making too many strenuous decisions, particularly financial.
The markets over the previous number of December/January periods often show the phenomenon known as a Christmas rally. This was certainly the mood in the US equity markets as they pushed to fresh highs, leaving the Aussie market holding well short on excitement and celebration, with a flat or falling tone across the major stocks.
What might occur
Australia's equity market is built on two main platforms, the finance and banking arenas. And of course our global tag of being a mining and resource rich economy. There has been movement in one of these platforms; the resource and mining fields, whereas the finance area has fallen into a slumber of sideways movement.
So, in 2011 to understand broadly what might occur, we can form some opinions on what is likely to drag our economy higher or lower. The commodities story has been one that experts discuss daily as having generations of growth to come, and in isolation that is likely. How that translates to the value of Australian companies is another. Variables like the Aussie dollar will always play a part in that story.
What the markets are saying
Many in the markets are saying commodities could also be a little overheated, and time for a retreat. This would not bode well the for the Aussie markets as a fall in resources would impact the markets heavily as the other platform of finance stocks may not be able to hold the slack created.
The finance sector in the weekly chart below shows a sideways take as mentioned and this has been the case since June 2010. Now it seems odd that against the fundamentals of rising banking profits and the like that the share value would also increase.
Analysing stocks
These fundamental effects and the flow on can be measured and it is a valuable why of analysing stocks. My preferred method does grate on some here on the boards, but a technical chart reading view does allow me a cheating way of not having to understand and price all the fundamental news and opinions. If the market is not moving one way or another the chart will show us that. We venture elsewhere for one that is.
We have an incredibly stable banking system in Australia that has weathered storms better than most. So could the fundamentals of global debt be holding back the surge in the shares prices?
The global picture of commodities also has many fundamental drivers. The Baltic Dry Index and the like can be used as indictors for strength in global commodity prices. I look at the Goldman Sachs index listed in Chicago as a tool that can highlight the trends in a basket of commodities in the same way we use a stock index.
In this chart of that index we see it's risen to just over 50% of the fall in the GFC, a good sign to be above the 50% level but using a variety of technical patterns it does look like it may need a pullback before it can push higher. That being said, unlike shares commodities can spend a long time going sideways and then explode to the upside. They also fall just as quickly, so opportunity in moves is there if you can tame the volatility.
So what can we watch for?
A slide in commodities will impact the Aussie shares directly and this flows through to the broader stock market and economy on the whole. Can the finance stocks show the way forward with commodities? If this was to occur you would expect 2011 to be higher for the markets.
The bottom line
To my thinking we are unlikely to see both these key areas firing at the same time in the short term, so we could see a continued dragging on the index as markets like the US move forward. This will mean stock selection , and the ability to adjust opportunities will be key criteria in this year. Unfortunately it may not be a year to set and forget and hope for results. The 'autopilot' approach of 5 years ago seems a long time back.
Good Trading
Aaron Lynch.
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All recommendations are provided without consideration of any specific reader's investment objectives, financial situation or particular needs. Those acting upon such recommendations do so entirely at their own risk.
