Outlook for The rest of 2008

February may be the month that makes or breaks the retail investor for the time being. The early part of the last four years saw bullish moves and optimism. January 2008 was the worst start to a year in recent memory and the biggest monthly fall since the crash of 1987. These are factors to take into account as the year unfolds.

The standard response will be to stay on the sidelines. Those already invested, and without a careful plan, will rely on hope or luck to improve their lots. The skilled investor, however, will be looking to take advantage of an uncertain market and go on the offensive.

Global fundamentals turn slowly, so whilst good times may be around the corner it may be a long way up the road to the turning point. The trend is down on weekly and 3-day swing charts. Markets are testing areas of resistance, such as major 50% milestones, and looking weak on a technical basis. The combined effects of interest rates, inflation and a potential US recession have called the profit forecasts of many companies into question. A weak housing market and reports that companies are laying off staff has the US market looking less than robust.

For the local market here in Australia the resource boom may be enough to keep recession at bay, but already we have seen a decline in some resource prices due to fears of falling demand. Equities and commodities are interlinked – it’s very hard for one to thrive while the other falters. Reduced demand for commodities affects a company’s bottom line.

One excellent tool for tracking commodities is the Goldman Sachs commodities index, which measures the strength of a basket of commodities and is a guide to the overall sector. The chart below shows the commodities index GI-Spotv traded on the Chicago Mercantile Exchange.

Chart 1
Daily Bar Chart Goldman Sachs Commodity Index

click chart to enlarge

The most recent pullback into the January top was at approximately 50% of the range. Basic price forecasting suggests that if a slide in value continues we will see the next major low around the 551.30 level.

A slide in commodities will knock onto the equity market. Once a trend becomes entrenched it will take a wholesale shift in confidence to drag the market upwards again. February is a likely forecast of what we’ll see for the rest of the year. However it turns out, those with a strategy will be better off than those who are simply hoping that things get better.