Shares – Fortune Favours the Brave

Share market sentiment takes an ugly turn today. The question for investors is glaring – “is this a buying opportunity, or the start of much worse to come?”

Overnight action is indicating worse to come. Markets ignored a positive reading on the Conference board’s US Leading Indicator Index – an economy wide measure – and company reporting over the last three weeks of an economy wide average increase in earnings of 18%.  Instead, it sold off on a weak Philadelphia Fed manufacturing read, a slight increase in jobless claims and a higher inflation reading driven by oil prices that have since fallen.

Safe haven buying saw gold trade to another record high. Ironically, another asset class to move close to all-time highs is US bonds, in spite of the fact that a considerable contributor to current fear is concern over the US economy.

Clearly, sentiment is driving markets at the moment. If this negative outlook starts to weigh on consumer and corporate behaviour, the fear could become self-fulfilling.

However, those who prefer numbers to emotions could be readying to buy. The only way to justify current share market levels is to assume a vicious cut to current earnings estimates. If this massive revision does not come through, on any of the basic measures of share value – PE ratios, dividend yields, discounted cash flow valuations – shares are cheap.

Investors with a 12 month or longer investment time frame may do well to remember the saying – “fortune favours the brave”.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , , . Bookmark the permalink.

4 Responses to Shares – Fortune Favours the Brave

  1. daveold says:

    gosh, this sounds like a carnival barker on the eve of a potential act two global banking crisis triggered by eu, not to mention a possible resulting depression.

    • michaelmccarthycmc says:

      Thanks for your contribution Dave – though I think “carnival barker” is a bit harsh! I acknowledge there are risks at the moment, but its my view that sentiment is dominating, not a rational appraisal. I note that both Spanish and Italian 10 year bonds remain under 5% as at Friday night. My take on this is that Euro bond traders don’t share your fears of a financial catastrophe.

      If you’d like to view the exposures of European banks, the European Central Bank publishes the data regularly – here is a link to the ECB’s publications page:

      http://www.ecb.int/pub/pubbydate/2011/html/index.en.html

  2. Joel says:

    If the SPX breaks 1110 not yet time to buy–any thoughts for the readers??

    • michaelmccarthycmc says:

      Hi Joel – you may well be right, technically if the S&P500 falls through the August 9 low at 1101 it will look weak, at least in the short term. The argument I’m making is more fundamental – either company earnings estimates have to be revised savagely downwards, or share markets are oversold.

      Of course, under current market conditions risks are elevated, but both bulls and bears can profit from the short term swings.

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