Saturday, 30 August 2008

XAO Finishes Up in August

The XAO had its best month since April rising 3.6% for the month and defying my expectations of further falls. I can't say I'm surprised, I don't profess to have any special insights into short movements of the market, nor does my investment philosophy depend on them. However, it does provide a bit of entertainment.

As mentioned here before, a typical characteristic of bear markets are short sharp rallies that ultimately fail. On the graph below I've identified two major rallies that ended in lower lows. However since the bottom in early August, we really haven't gotten a sharp powerful rally. That's not to say that we need to have one, but that it makes it more difficult for me to make the case for a reversal in September.

What I would like to see is a sharp clearing rally, the rally from the early August lows has only taken the index up 6.8% so far. Something in the order of 10 - 15% would make me feel better about calling for a correction. Of course, events won't play out the way I want them to, but there may be a catalyst for stocks to rally next week.

From a fundamental perspective, the almost certain decision by the RBA to cut the cash rate by 25 bps could spark a rally and if, as some expect, the RBA cuts 50 bps, the market can expect a nice bounce.

However, regardless of the monthly moves my fundamental position that the XAO will make lower lows as we go forward remains in place and that RBA rate cuts, whilst they may provide the impetus for short term clearning rallies, will ultimately fail in a environment of general asset deflation, just as the US Federal Reserves cuts did.

So what then for September? Data from the last 24 years suggests that September is not the best month for stocks but neither is it the worst. The XAO has risen 14 times or 58% whilst declining 10 times.

I'm expecting a rally of sorts in September and then a drop off on entering October as the reality of third quarter weakness in corporate profits and economic growth both domestically and overseas sinks in. However I expect the rally to hold it's gains long enough for the XAO to finish up in September.

And don't forget to have your say and vote in this month's poll at the top left of your screen. Poll will stay open until Tuesday afternoon.