Looks Like 2007 Could Be the End of Australia’s Raging Bull Market

MELBOURNE AUSTRALIA (Daily Reckoning): Another 'steady as she goes' week for the All Ordinaries last week as it continued on its seemingly irreversible - only seemingly though - march towards 6,000 points and beyond.  Although as we mentioned last week, the focus is now on 7,000 points.  Can it get there by the end of the year?

Tough to bet against it at the moment, and perhaps there are still a few more investors on the sidelines that have held back thinking the market has topped out who won't be able to resist plunging in as the market moves ever higher.

For its part the All Ordinaries' sister index the ASX/S&P200 did momentarily break through the 6,000 point barrier last week before slipping back on Friday.  Given that the ASX/S&P200 is itself a tradeable instrument through an exchange traded fund (ASX: STW), and also through options, there is added potential for it to impact market activity as technical traders look at all manner of indicators as it trades around this level.

When will the battle of wills finally play out for us to see a considerable drop in the index?  It's tough when there is such a huge weight of money to be invested.  But let's not forget that even a weight of money theory still has to contend with market fundamentals, economics and supply & demand.

In order for investors to be encouraged to buy shares there has to be some belief that the company will continue to increase its revenues and profits.  It's all very well to say that there is 9% of every working person's salary being invested in superannuation which then needs to be invested in the financial markets.

However, it doesn't necessarily need to be invested in the Australian stock market.  Most funds, whether they are a simple retail managed fund, or a superannuation fund, will have a range of the minimum and maximum amounts that it will invest in each asset class whether it is Australian shares, international shares, cash, fixed interest, property, or anything else.

We can take a rough guess that at the moment most funds would be sitting close to the maximum allocation for Australian shares.  But they are only doing so because they would believe there is further growth potential in the market.

Once they start to believe that the market is nearing its peak their appetite for Australian share investments will gradually dissipate.  They will start to increase their exposure to the other asset classes mentioned above, or even to the sort of unlisted infrastructure funds being developed by Macquarie Bank (ASX: MBL).

Also let's not forget the overseas funds that have assisted the Australian market on its climb north with their buying of Australian shares.  They have little or no sentimental interest or obligation to invest in Australian assets.  Should they see better investment opportunities in Canada or New Zealand or Japan or Hong Kong, chances are that they will bolt as quick as you can say "it."

Shane Oliver at AMP in Sydney told Bloomberg News "The 6000 mark is a psychological barrier more than anything, so you'd expect a sell-off immediately following a 500 point run over the past five weeks or so."  He went on, "We're at the latter stage of a four-year bull market so there tends to be excessive bullishness around."

Oliver says that he has a target of 6250 for the benchmark index by the end of the year, a mere 5% gain above Friday's closing level.  That would give the index an annual return of 10% for 2007, a big drop from the 20% return for 2006.

Adnan Kucukalic, strategist at Credit Suisse in Sydney told Bloomberg, "The Australian market is not cheap.  The market's price earnings ration expanded by 10 percent in 2006, and most sectors are at peak multiples.  At the same time earnings growth is slowing from 15 percent to 10 percent.  We see the market flat for 2007."

If Kucukalic is right, he is effectively predicting that the market will fall by around 5% to get back to the level where it was at the start of the year.

However, will share market investors be happy with the prospect for a flat year?  We wouldn't have thought so.  If too many analysts start pitching the idea of a flat market for 2007 then it is more likely that the rush for the door will turn to a stampede leading to a significantly bigger fall than the 5% predicted by Kucukalic.

Kris Sayce
for The Daily Reckoning Australia

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