The bulls and the bears fight for control of the market: Gottliebsen

In the final hours of trading on Wall Street at the weekend we saw bulls emerging – people who believed that what we are experiencing is a normal healthy correction and so it was time to pick up bargains.

And over the weekend in Australia key people at CommSec (Craig James) and AMP (Shane Oliver) made similar statements about the local market. They argued that there was substantial value in the market – something they think will be confirmed as the interim profits season gets into full swing.

The bulls say that there is no way the EU will step away from Greece – they believe it will be rescued and it will be back to business as usual with the euro recovering and the US dollar slipping back.

On the other side, there are those who believe that what we are seeing is something far more substantial than a normal correction. There is also a middle view that says that the Greek problem may be overcome, but that what we have seen is a glimpse of the much deeper problems which will emerge as 2010 proceeds.

If these deeper problems develop, Australia may be more affected than most markets and we might even stay under pressure even as Wall Street steadies.

Whether you believe in the chartists’ views on markets is immaterial. A lot of people do believe in charts and they can play an important role in setting markets. The small charting service Futures 618 has been bearish for some time and after the fall in the Dow index of US shares says that there will be considerable support around the 9,700 mark. The Dow is around 10,000 so the next couple of weeks will see a titanic struggle between the Wall Street bulls and bears. Futures 618 says the bears will win and the market will fall further, but that view has to be tested.

Why are we more vulnerable? Because our market is closely linked to commodities which are under the pump for additional reasons. Firstly, there are the credit clamps in China and the likelihood of a China slow down. This is actually a good thing longer term, because 11 per cent growth rates are unsustainable – but such a slow down can be painful.

And there are two other forces unsettling commodities and the Australian dollar. Those who borrow at the low US-dollar rates and then punt markets have found commodities and the Australian dollar a harvest of profits – this is the so called carry trade. In the past couple of weeks those carry traders have received a beating and are still unwinding their positions (ie. selling commodities and the Australian dollar). In addition we have fears of trade wars between the US and China.

So here in Australia the bulls spearheaded by James and Oliver and the bears will have an even tougher struggle.

Where do I stand? I find predicting short term market trends very dangerous. It seems every time you get it right will be matched by a time where you are wrong.

But my longer position has not changed. What we have seen in the markets in the past couple of weeks is a series of forces that may fade for short periods but will not go away. The Greek problem may end up being solved, but it will be replaced by some other European country and the bottom line is that the banking system has enormous exposure to Greece, Portugal, Spain and Italy and turbulence in any of these countries will disturb the markets.

As 2010 proceeds, so the need for the US, the UK and other countries to borrow huge sums will see the cost of capital and global interest rates rise. Those higher rates will be one of the biggest continuing forces in setting the overall level of markets.

This article first appeared on Business Spectator.