Why Longer-Term Equity Investors Should Be Encouraged

  • April 2, 2003
  • Edward Allen

Despite the apparent tug of
war in the global financial markets,
recent price action in these markets has been rather encouraging for equity
bulls. Short term however, the likelihood of sideways trading is likely since
the daily back-and-forth developments in the war will continue dictate the
market’s direction.

  1. First, crude oil has not been able to
    regain its footing on the upside, as supply concerns have diminished
    on the back of several factors including: coalition gains in Iraq,
    resumption in crude shipment from Venezuela and an apparent end to the
    civil unrest in Nigeria. In turn, lower crude oil prices are now
    feeding through to gasoline prices, which should then start to free up
    consumer and business spending.

     

  2. Second, from a technical perspective, the dollar seems to be forming a
    base against the European euro and the Japanese yen. And any US dollar
    gains are not the result of short covering, since market positioning
    indicates that US dollar shorts are at their lowest levels since the
    US dollar began its decline, in earnest, one year ago.

     

  3. Third, investor flow data suggests that most of the equity market
    buying has been institutional, as retail investors have continued to
    pile into bond mutual funds while institutional investors have been
    simultaneously been pulling their holdings out of money market funds
    but haven’t been allocating this money to bonds.

     

  4. And fourth, the information technology sector has managed to
    outperform a falling market year to date. For obvious reasons,
    investors have avoided IT for the last three years and this relative
    enthusiasm is certainly a good sign for the market. (I will expand on
    this tomorrow.)

The only missing piece in this setup is an improvement in industrial
metals prices, namely copper and aluminum, which should see increased
demand in an economic upswing–but recent market activity indicates
that lower base metal prices are a result of shorter-term speculative
fund selling, rather than hedging activity by producers.

Edward
Allen