Friday, December 21, 2007

The stock markets poised for more volatilities and further declines

Back in May 2007, I warned about the worrying inflation outlook and how it might negatively impact the stock market.

7 months later, we are seeing the CPIX inflation rising to 7.9%, far above the Reserve Bank target range of 3% - 6%. The Reserve Bank has raised the interest rates by 4% since the middle of 2006, with more interest rate hikes likely. Consumer spending slows down, car and durable goods sales have gone into the reverse, while property prices are growing slowly.

Globally, the US subprime mortgage problems have caused investment banks to write down more than USD100 billion, as well as credit crunch worldwide.

What we have seen over the last six months are very volatile stock markets. Although many stock markets have achieved new historial highs in the last six months, they have been going up and down in big swings.

There are a few things I think will cause our JSE to be range-bound, if not declining, over the next 6 months:

- High inflation and high interest rates: Consumers are already suffering the effect of high oil and food prices, as well as higher debt repayments. They will spend less on durable goods and high-value electronics, and they will be forced to buy less cars and properties.

- The US subprime mortgage crisis has already, and will continue to negatively affect banking stocks, even though our local Big Four have very little exposure to the subprime problems.

- With a slowing US economy, further price gains for base metals will be unlikely, limiting the future profit growth of our resource companies.

- Techinically, the JSE Top 40 index has been in a lower-lows pattern: Since September, it has failed to make new highs, while it continues to make new lows. The chart is pointing to further downside to come.

Traders should continue to trade with caution. Shorting is probably a better strategy than the long side at the moment.

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