Delusion is a powerful thing

The All Ords rebounded almost 2% today clawing back most of yesterday's losses. Today's rally had conviction, strong volumes as buyers were back with a vengeance. The sentiment seems to be that the recent sell-off triggered by the Shanghai markets last week was just a short correction and the time is ripe to jump back in and pick up some bargains.

However there seems to be a disconnect in thinking with the US. US investors have strong memories of a recession just a few years ago which Australia bypassed riding the back of the resources boom and a generally strong economy. Also today the $USD fell below 116 to the yen. Anecdotal data suggests money is flowing out of Mutual Funds at a rapid rate. Sentiment in the US seems to be that they are getting prepared for a bear market. The US economy is looking shaky, durable goods orders well down, new home sales and new house prices down in January. Inflation risk to the upside and credit market troubles gaining momentum.

Australia's economy is looking weaker now than it has in the past few years. Official GDP growth numbers due out soon will show a sluggish expansion of around 2%. The commodities boom has run, any increases in prices if at all will be moderate going forward. Inflation is still slightly ahead of where the RBA would like it and the risk to interest rates is leaning toward a hike.

Australian investors haven't seen a bear market for 6 years. The stockmarket tends to have a short memory of such things. The economy is not in such good shape to ignore the US lead. A 5-6% correction in stock prices does not mean value has been restored. Equity market valuations have gotten so far away from reality in recent years as to be bordering on the ridiculous in some sectors. I'll be holding on to my yen for a little longer. The best bargains are yet to surface.