ASX, Dow buying momentum will be exhausted…next week
When all bearish objections fade away and die on the lips of even the most ardent sceptics, then you know the market has reached a top. The question is, are we at the top?
We've never quite found the question as confusing as it is today. So today we will try to un-confuse it, or defuse it perhaps, by breaking it apart into its pieces and turning them around under the light. There is China. And there is America. And of course, there is Australia.
First is the new high on the Dow. This you can quickly, almost reflexively dismiss as thoughtless buying by cashed up, heedless fund mangers. Yes, corporations have billions in cash on the balance sheet. And yes, the housing market has not ignited a wealth-destroying inferno in the stock market or the American economy. But what is it you're counting on if you buy American stocks at these prices? Higher earnings? Stronger growth? Increased money supply?
No, no, and yes. To buy stocks merely because they are going higher defies common sense and historical sense. Yes that is exactly what people tend to do. It is easier to go along than stand apart.
But those are all platitudes. Practically speaking, the Dow and the ASX/200 have had remarkable runs. The buying momentum has to get exhausted at some point. That point is probably sometime in the next week. And then comes May...and what?
Here we think a great divergence is taking place in the global market and the economy. Increasing money supply may drive up U.S. stocks, at least nominally, for the remainder of the year. But this is not real wealth being accumulated. For that, you have to look East, where the economic story may become unhitched from America. This will cause some volatility. But ultimatley, it's hugely bullish for resources.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.