This Is The Rally Nobody Noticed

Published in Investing on 23 July 2012

A timely reminder that we should not give up on stocks and shares.

There's no news like bad news, and there's been plenty of that lately.

The eurozone meltdown, US fiscal cliff, Chinese hard landing and UK double-dip have kept journalists busy.

Good news is no news. Which may explain why nobody has remarked upon the strange fact that, despite all those dismal financial headlines, stock markets have been rising.

This is the rally nobody noticed.

Rally? What rally?

One minute I'm reading an article by Peter Comley, author of the excellent Monkey With A Pin, setting out what he will do when the FTSE 100 hits 4,000. The next, I discover the FTSE 100 has been actually climbing ever closer towards 6,000.

And while the papers are splashing on Dr Nouriel Roubini's warning of a Global Perfect Storm, few care to mention that US stocks have just hit a two-month high.

This is the rally nobody predicted either.

Up down, up down

Part of this may be down to volatility fatigue. One month the FTSE 100 stretches hopefully towards 6,000, then slips. The next it lurches desperately towards 5,000, only to rise.

Without a breakout in either direction, people lose interest.

I'm not saying this rally is going to break that trend. It could be over by the time you read this. But it is a timely reminder that we shouldn't give up on stocks and shares.

Here's why.

Companies are making money

The macro data may be lousy, but the micro is a different matter. US corporates IBM (NYSE: IBM.US), eBay (NYSE: EBAY.US) and Intel (NYSE: INTC.US) have just posted positive earnings reports, beating analysts' expectations.

Results from JP Morgan Chase & Co (NYSE: JPM.US), Goldman Sachs (NYSE: GS.US), Citigroup (NYSE: C.US) and Coca-Cola (NYSE: KO.US) also cheered markets.

Astonishingly, given all the gloom, corporates are still making money. That's a positive sign for the global economy, and in the longer run, stock markets.

Equities aren't dead

Many private investors have given up on equities. Some have stopped saving for their future altogether. The number of people contributing to a personal pension has tumbled from 6.4 million in 2009 to just 6 million last year.

You can hardly blame them.

But as the recent rally shows, stock markets aren't dead. In fact, they're bursting with suppressed energy. They're desperate to break out of their austerity-enforced trading range.

And one day, they will.

You can't ignore this market

A couple of months ago, with the FTSE down at around 5,200, I was dripping money into a low-cost FTSE All-Share tracker, and I'm very glad I did.

I would have paid in more money, but like Pete Comley, I wanted to keep some ammunition dry for when the index fell even lower. Which it hasn't.

This is yet more evidence, if you needed it, that you can't predict the market. Anybody holding off for that global perfect storm is playing a risky game. As we have seen, markets can rise when nobody expects them to, and when most people have stopped looking.

The best you can do is feed money in, little by little. Either with a regular monthly payment, or by investing on the dips.

I didn't spot it either

I'm not saying this rally will last. Actually, I don't even want it to. As I wrote last year, I Hate It When Stock Markets Rise, because I feel the most profitable opportunities are slipping through my fingers.

Plenty of big-name shares have been flirting with 52-week highs of late, for example British American Tobacco (LSE: BATS), Vodafone (LSE: VOD) and Diageo (LSE: DGE). But I would rather buy these solid blue-chip companies when they were eyeing their 52-week lows.

They're cheaper that way and the yield is higher as well. I'm worried this rally will continue, forcing me to buy at higher prices.

This is the rally nobody noticed or predicted. Some of us don't even want it. But here it is.

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> Harvey Jones owns shares in Diageo and Vodafone. He doesn't own any other shares mentioned in this article

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Comments

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onlyben 23 Jul 2012 , 11:38am

Hi Harvey,

You say that BATS, VOD and DGE are close to their 52 week highs which is putting you off buying them. You would prefer to pay less for these companies because, like you infer, you'll be getting more for your money.

However, as we know, it's time in the market and not timing the market that is the only truth. I would happily pay the current prices for the three companies you mention, and I have in some cases, because I actually think they are low prices.

What are you buying these companies for exactly? If it is for the dividends then unless you think the companies are overpriced - not high, but overpriced - then the share price isn't really that important. If you're not buying for the dividend then I'd be really interested to know why you'd buy any one of these three.

Thanks in advance,

Ben

ProfessorMarcus 23 Jul 2012 , 11:45am

And as if by magic....

NikThomas 23 Jul 2012 , 11:54am

"A couple of months ago, with the FTSE down at around 5,200, I was dripping money into a low-cost FTSE All-Share tracker, and I'm very glad I did."

Was the All-Share index rising and falling with the FTSE100? If not then there's a false premise in this paragraph.

F958B 23 Jul 2012 , 12:36pm

<< ".....This is the rally nobody predicted either....." >>

//

Really?
I posted the following on the boards (run a search):

26th May (FTSE=5400):

"....Now may be a good time to "buy the dip", but the likely summer/autumn rally may need to be viewed as a chance to exit at good prices...."

-

20th February (FTSE=5900):

".....this uptrend may have only a matter of weeks left before a topping pattern begins, followed by a heavy correction....."

-

30th September (FTSE=5100):

".....I believe that we are just a short period away from an explosive "relief rally" in the markets...."

-

22nd May 2011 (FTSE=5900)

".....I would not be hurrying to deploy that money anywhere. There is a lot of risk and not a lot of reward at the moment, with many markets over-extended after prolonged uptrends.......QE has been propping up financial markets......With QE coming to an end in a few weeks, asset prices look likely to stagnate at best.......That will not be good for....high-beta shares....."

Luniversal 23 Jul 2012 , 1:30pm

The fear is that the latest round of unexpectedly good profits news is purely down to cuts in labour and capspend plans and reordering of finances which are unrepeatable moves. The deficiency of demand prevents companies from parlaying this housecleaning into a prolonged uptrend based on selling more stuff to eager, non-price-conscious consumers. If there were to be such an upsurge, some firms fight find they had cut not wisely but too hard and would be unable to fulfil orders.

All credit to businesses on both sides of the pond for getting their houses in order faster and more thoroughly after the crisis hit than our debt-sodden individual and governmental sectors, but that action may by now be fully priced into London and Wall St. QE has not proved the magic bullet for kick-starting the developed world's economies, and their interdependence, with big eurozone mebers tottering or facing decades of austerity, adds reasons not to be cheerful.

Aiming one's wealth towards equities with emerging and emerged markets, or defensives back home, still seems the best way forward-- and with dividends as the sine qua non.

ANuvver 23 Jul 2012 , 4:22pm

Whatever corporate earnings may have to say - and this is the week we'll really start to find out - any good news is now getting drowned out by the pain in Spain and more Greeced frightening. The bond battalions predictably starting to mass against Italy. Meanwhile the US is increasingly in election ostrich mode, currently pondering the delightful conundrum of how it's humanly possible for Romney to have the rough equivalent of a SIPP valued in eight figures, and something about a horse that his wife owns a leg of.

It's going to be another Eurosummer.

Keep those watchlists shined up and ready for action. 5,2 soon, but 5,8 again by year-end. I can see the New Year financial headlines already: "Busy going nowhere", "The year of living dangerously - but for what?", etc.

rober00 23 Jul 2012 , 5:03pm

"Aiming one's wealth towards equities with emerging and emerged markets, or defensives back home, still seems the best way forward-- and with dividends as the sine qua non."

Luniversal - you must have read my mind.

No doubt some Foolish writer will be paid to write an article to this effect in the next few days, claiming the credit for the blessed Woodford!!

rober00 23 Jul 2012 , 5:52pm

Harvey

I am puzzled at your portfolio strategy?

You appear to hold back monies in the hope that markets fall, whilst investing on a regular monthly basis. This appears to make no sense. In the current volatile market situation I can see the benefit of pound cost averaging ( although monthly investment costs seem prohibitive), but holding back monies in presumably inflation losing savings accounts, is plain crazy.

If you have an effective investment strategy and therefore investment portfolio, why are you not fully invested , benefitting from either/or growth and very good yields?

I am 98%invested in a high yield strategy (not Stephen Blands model) and have been so for sometime, indeed the last sale I made was in 10/11 and have only made purchases of one additional share this year.

My costs last year were 0.03% of which stamp duty was the biggest part, due to limiting my purchases to meet my investing objective.

Can you match or beat these costs under your approach. I would be very interested to know!!!





jaizan 23 Jul 2012 , 11:37pm

Roberoo, many of us are working, so we have fresh capital to invest on a regular basis.

monkeywithapin 24 Jul 2012 , 7:49am

Harvey - I thought I'd pick up on your interpretation of what I said about the FTSE hitting 4000 at some point in the next few years. I still hold by that but I never said it would happen now.

What I didn't write in my post about that (http://www.iii.co.uk/articles/36243/why-i%E2%80%99ll-buy-40-random-stocks-when-ftse-100-hits-4000) was that I had a personal belief that the FTSE would go higher in the short term.

If you look at the S&P over the last 10-15 years, you'll see it has topped out at around 1500 twice before (in 2000 and 2007). There is a certain mathematical symmetry that suggests to me it wants to repeat this at some point (in the next year) and this is the "unpredicted rally" you refer to. What will cause the final push? I suspect it will be QE3 in the US.

The FTSE will get dragged up by that event too. Personally, I think the FTSE won't make back its previous highs but will probably end up around 6200-6300.

However after that event, all world indices will decline - possibly when it becomes apparent how useless bouts of QE really are, possibly after China implodes, or more likely when the euro starts to break up. I know not why, nor care, but I just have a hunch it is going to happen. It is after that that the FTSE will put in a low sub 4000 (not in the immediate future).

Then will be the point at which investors can make the biggest killing. So keep some of that powder dry. Also don't lose those darts, as you'll need them then to pick your random shares amongst the tatters that will follow such a decline.

Pete Comley
Author of Monkey with a Pin

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