Wednesday 12th October 2011 1 Comment
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The decline on markets on Friday, the last trading day of the quarter, suggests institutional investors decided to abandon their traditional 'window dressing' habit of pushing up prices on such days to make their returns look as good as possible. Because the quarter had been so bad, with double-digit declines for many markets, investors are likely to have decided to sell down shares on the last day to bring as many losses as possible into that quarter.
This way, they give themselves (and us) a better chance of recording a positive fourth quarter.
Since then, there has been a recovery. Noises coming out of Europe that banks will be propped up no matter what it takes obviously is giving investors some comfort.
While share prices have recovered, there is still no sign that robust economic growth is going to be achieved in the near future in either the US or Europe.
Since such growth is important for corporate earnings, and therefore share prices, it is hard to believe that a sustained bull market is imminent despite recent optimism.
However, after being among the most battered stocks in the past six months, resource companies are showing a sharp recovery.
This seems fully justified as many of these companies are trading a very low price:earnings multiples.
On the other hand, their prices seem to be very sensitive to investors' views about the global economy and further dips in reaction to bad news is inevitable.
For those prepared to be patient, there are some good buys around at present.
Large, diversified producers like BHP and RIO, for example, are sound investments offering very good prospective returns. Their prices have declined for much of the past six months but have suddenly turned this week, suggesting they may have bottomed and are well worth having a look at.
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