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Is this the beginning of the end?

by wise-owl.com

Wednesday 14th March 2007

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Itís been a wild ride on the stockmarket over recent weeks following a one day 9% drop in the Shanghai Stock Exchange, which effectively got the selling ball rolling for global markets.

Major indices in Asia, Europe and the US fell and a number of these are now showing negative gains for the year. The US market was less fortunate and suffered the biggest weekly drop in four years.

Which begs the question, is this it? Do we eat, drink and be merry while we still can? Are we about to witness a prolonged bear market? Or is this simply the start of a healthy short term breather that will give long term investors a great chance to invest at better prices?

Before looking to the future, letís take a look to the past. If history is any guide, the best buying opportunities often come when the market has corrected. Just take a look at the most recent market correction which occurred in May last year. The market dropped by approximately 12% over a five week period and although this was quite damaging to investors with open positions, at the same time it also created some excellent buying opportunities.

∑ Out of the fourteen recommendations made by wise-owl.com directly after the market correction in May last year, four companies generated returns over 70%, and five others created returns from 20% to 70%.

∑ The main standouts were Lynas Corporation (LYC) on the 18/6/2006 which has produced a potential 105.88% to date, and ITL Limited (ITD) on the 25/6/2006 which created a potential return of 75.81% for wise-owl.com members.

∑ S8 limited (SEL) and Powertel Ltd (PWT) were also strong recommendations, both generating potential returns of over 70%.

While there is always a risk that economies will slow down, and there are anecdotal signs the US economy is slowing, we seem to be as far away from a crisis point as we ever have been. The sheer difficulty many have had linking the marketís recent fall to any specific item of news or event, suggests the fundamentals have changed very little.

Over the past four years, whenever our market has traded too far above its 200 day moving average, we have experienced quite a predictable short term correction. When the index moves more than about 10% away from this average, a pullback soon follows. So a quick glance at a chart will show weíve been trading on borrowed time for a little while now. If history is any guide, the market will trade sideways to down until it gets closer to the 200 day moving average, where value players will then be likely to step in and start snapping up the bargains and drive prices higher again.

At this stage we are yet to come across any evidence to suggest the Ďbull runí in our market is over. Low unemployment, acceptable inflation, and reasonable growth is far from an economic horror story, and unlikely to translate into a bear market.

Several markets have posted very strong gains lately, and frequently when this occurs they pull back for a little while before going on to make more gains. ĎThe faster they rise the harder they fallí certainly applies to share markets.

Looking forward, the fundamentals are showing a stable environment for the stock market to continue its growth. This suggests that this latest recoil appears to be just a short term correction. So when the time is right, there will be outstanding buying opportunities in the market. And what if we do enter a dreaded bear market? Weíd suggest thatís nothing some good old fashioned bottom up stock selection canít help. Even in a bear market you can still find companies that outperform.

While some management teams are good at identifying problems, others have a habit of finding solutions and even opportunities. If a business model is robust and lead by the right people it can continue to grow when conditions are tough, attract investors when they are cautious, and last but not least, rise in value.


Wise-owl.com analysts are constantly researching the market ready to make exciting recommendations regardless of market conditions.

Register your details here to receive your complimentary wise-owl.com Equities Report and ensure you know what to do when the market takes a breather.

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