MARKETS AND INVESTORS ARE UNDER PRESSURE

It has been an exciting few weeks in the world financial markets and it seems that the excitement is not yet over. After a fairly strong(ish) relief rally yesterday, markets fell from grace (once again) this morning after news broke of a German Sovereign downgrade. Naturally, the DAX sold off sharply and was shortly followed by the rest of the world. It would seem that the panic is spreading.

Panic. A word that has been on the lips of many journalists for a few weeks now. Before we go any further, Warren Buffet once wrote in a letter to his shareholders that "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

In other words, the conditions for some serious bargain hunting is almost right, although in this writers opinion, not perfect yet. The truth is that we will never know exactly when the market is going to turn. We will more than likely end up getting into (or out of) the market either a little soon or a little late, that's ok. As long as we aren't trying to pick the bottoms (and tops), but rather wait for a confirmation of a trend reversal, we should do just fine. 

So; when everyone else is fearful, be greedy. When things look like they are so bad that everyone you hear talking is crying about how much they have lost, or how bad things are, when everyone is so swept up in the panic of the falling market, that is when we must strike and start buying stock.

Is that day today? Perhaps not. Can we tell when it will be? Not now we can't, but when the time comes we will know.

Let's have a look at some of the recent events in the market.  We all know the Cyprus story, so I won't harp on about it. Some of the more recent drivers in the market have been bad employment data from the US, slower than expected growth out of China and today's German Sovereign downgrade.

First we saw worse than expected PMI data from China, USA and Europe, shortly followed by US Unemployment Claims that were 33k higher than expected and Non-Farm Employment Change numbers that came in at 88k, fully 110k lower than expected. And that was just the first week of April. 

Later we saw worse than anticipated CPI data from China as well as GDP growth of 7.7%, which by any measure is fantastic, but the market expected 8%. The markets slipped, commonalities slipped and the Rand lost much of the ground it had worked so hard to regain against most major currencies. All in all, economic data has not been the most bullish in the last few weeks and it has put markets under severe pressure. The feeling is that more pressure is to come as, if we recall, China had warned at some point that their GDP growth for 2013 is expected to average 7.5%. Now if we saw such adverse reaction to the data released from China a few days ago, imagine how much more pressure will be put on commodities and commodities based stocks when this number comes in below 7.5%. 

Surely we cannot tell the future, so we will just have to wait and see what the outcome is when we get there. Although I don't think that a bear market in commodities prices in completely impossible. Time will tell.

From a Technical Analysis point of view, it does appear likely that our market will come down to test the 32000 level on the ALSI (Top 40 Index). It won't get there by moving in a straight line though. It would seem that it could likely bounce higher by about 1000 or so points to test the 35000/35500 level before pushing further down. If we compare recent post-recession years to this year, the trend has been to consolidate and drift slightly lower from January/February until the end of May/June, before trading higher for the second half of the year. 

The feeling is that given the fundamental/economic data that has been driving the market over the last few weeks and the historical trend over the last few years, it is likely that a difficult first half will be rewarded by a rally closer to the end of the year. It would also appear likely that our market has some way further to fall before we start seeing any real, sustainable relief. 

The facts are that commodities are under pressure and that South Africa is a commodities based economy. So the more pressure commodities prices comes under, the more pressure our market feels.

It is of course very brave trying to predict what the market is going to do, so I will have to acknowledge that I could be wrong at any point. I will say though, that once we reach the bottom of that channel line depicted in the chart above, we will have to be razor sharp. If we break through the bottom of that level convincingly, we are in for a much deeper correction. If that level holds though, we look set for new highs. We are currently in a healthy uptrend and a 10% to 15% retracement, or pullback, is natural and healthy. Also, macro trends tend to last somewhere around the seven year mark, so in my opinion, the chances of us entering a bear market is relatively low. I also think that by the time we reach the 32000 mark, panic would have set in properly and at that point, following Warren Buffet's advice should be at the very top of the to-do list.

For the moment though, we need to remain cautious and be sure that we do not take unnecessary risk, nor panic if we are in a position that is running against us. Remember, the professional traders make money from our fear-fueled decisions. 

Trade carefully out there.