Over the last couple of weeks, the market has been in decline wiping out its returns for the year. Frankly a technical correction has been due for about a month or so now, so no surprise that the market fell on talks about cutting back on the quantitative easing.
I think most long term investors are questioning whether it is good to enter the market again. And here are my personal observations so far:
(1) The index is currently sitting on its 200 day moving average. This, along with the job figures recently released could spur another short term bull run.
(2)
While the fed's cutting back is an event fundamental in nature, the market has corrected to an extent which can only be considered technical. The next thing we should notice from the 5 year graph is that fundamental corrections such as those in 2009 to 2011 are large compared to technical corrections.
(3) I often find that markets usually react to news at 2 points in time, one in the expectation of how an event would impact the market, and second at the point of the event. Since the market has already corrected on speculation that the fed would cut down on its bond buying (1st event), we can probably expect more correction upon the actual cutting back (2nd event). At this point in time, economist seem to think that the second event could occur as early as September, to later in the year.
(4) Reits have demonstrated their sensitivity to interest rate change. If the mere expectation of a rise in interest rates could cause the recent 8% fall in average values then what would the actual rise of interest rates and its subsequent effect cause?
(5) The Telcos sector with its high yields also seem to be like reits, affected by interest rate news and have fallen down greatly.
(5) Most commodity prices whether gold, palm oil, coal, or iron ore have fallen due to a supply glut. Commodity producers are trying to cut down on costs to squeeze out more value per unit of good sold.
Analysis:
What product?
With the upside of reits limited and downside risks huge, it will be best to limit exposure to the sector.
Commodities though attractive with a long term horizon (3 - 5 years) will probably trade sideways or slightly downwards further. A more appropriate time to buy it would be when the market is in the next consolidation phase.
Economic outlook/News will be the basis of my investment strategy going forward and the best product for broad market exposure would be the the ETFs.
Why?
News from the usual quarterly results will be firm specific while interest rates will remain the main theme over the medium term. ETFs will allow you to stay in the market without any significant exposure to weak/risky sectors.
When?
Although the market is currently sitting on its support, the release of the recent US job data revealed that unemployment had risen slightly. This had allayed fears that the fed would cut back on its open market operations and boosted the US markets on Friday. STI should take cue from this and rise on Monday.
My take is that with the low likelihood of any major news being released at least till September and the long term market trend intact, the market will continue to trend upwards technically with an upside of about 10%.
As such, entering the market over the next 2 weeks by buying ETFs would be best strategy for 3rd quarter.
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