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What do I mean by this? In the last couple of years markets have repeatedly shown patterns similar to the one we are facing now:
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That is, a corrective relief rally in the form of a wave four to be followed by a slide down to a wave five. In many cases over the last three years (as shown in the next chart) these negative outlooks have turned around and the gloom changed to relief and then optimism:
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In my opinion, the changing sentiment in the market has not been driven by fundamentals, but rather the sheer weight of money world-wide looking for a home as asset classes generally (including property) reach generational highs. This has happened despite warnings from conservative analysts that new bubbles - of a different form - are developing.
In almost all cases we have seen the relief rally change to a new impulsive five wave move higher:
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In other words, the market did not made the wave five low but rather just went higher. This has kept many out of the market so there is still plenty of money sitting on the sidelines.
Beware of becoming impatient if you are not in the market. Risks are mounting and you don’t want to buy at a so-called market high.
The question is: Will we see this again? Let’s look at the bigger picture:
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While the market is at just half of the high of three years ago, it is still looking a little toppy. You can see the market has spent the last two years range trading and this suggests it is undecided. The market has had plenty of opportunities to get on with it but it has not.
I think the current relief rally scenario will be followed by a slide as talk of a double-dip gathers momentum. I am not saying a double dip will happen but perception will constantly change about a double-dip for some time yet.
Enjoy the ride
Tom Scollon
Chief Analyst |