**24/09/10 - 8.38am - by James Gerrish**
We're set up for some weakness on the local market today which could spell the end of the short term move higher. I don't necessarily think a pullback is a negative. If it occurs on light volume (last nights session in the US was on very light volume) and it continues the structure of Higher Lows (S&P/ASX 200 stays above around 4400). Time will tell however I'm fairly confident that this bullish structure will remain in place.
The Aussie Dollar remains supportive of this move and if we look at the past correlation between the S&P/ASX 200 and the currency it becomes obvious that the equity market has lagged the rally in the Aussie Dollar. I'm bullish the Aussie towards parity and I think eventually we'll see our currency trade at a premium to the US given our strong growth outlook, extremely low Government Debt (compared to other developed nations) and the interest rate differential that is likely to expand over the next 6-12 months against the US.
One of the more bullish points in the market at the moment is the increasing volume coming into the second and third tier players, particularly in the resource sector (Sandfire, OZ Minerals, Equinox, Western Areas, Persius Mining etc) This is a trend thats likely to continue particularly given the cheap funding costs available in the US and Europe and exposure of Australian Commodities producers to high growth markets in Asia. If I was a US investor, I'd grapple with investing in Australia with such a high Aussie Dollar however the alternative of putting money in the US - an economy that is likely to struggle for the foreseeable future is not one I'd be too comfortable with. I'd rather borrow cheap funds, invest in a stable economy with exposure to the Emerging Market growth story.
There is also going to be demand from China as it tries to sure up its supply of resources that it needs to sustain i growth. There are now 170 Cities in China with 1 million + people. Over the last 45 years, more than 45% of China's population has moved from Country to City. That’s about 400 million people. One 90m2 apartment takes 6 tonnes of Steel to construct. To make 1 ton of steel takes 1.7 tonnes of Iron Ore and about half a ton of Coking Coal. These are astonishing stats and paints the longer term picture of growth for Australia.
That’s all well and good for the long term outlook for Australia. What we're really concerned about now is the timing of when to buy stocks to gain exposure to what I believe is a dominant theme. Over the last week or so, we've been looking at stock specific trends and found quite a few interesting ones. ASX, WPL, & ORG were the main ones which have all started to progress well since entry. It think the best way forward in this type of environment is to be conscious of the overall trend in the market, but be focussed on what’s happening on a stock specific basis to build portfolio's over time that are aligned with our view for growth.
Overnight, the DOW JONES lost -76 points or -0.72% to close at 10662. The FTSE 100 lost -4 points or -0.9% to close at 5547. Locally, SPI FUTURES are pricing a drop of 50 points on the open.
