So are we seeing a sign of some settlement in world markets in the wake of the saving of Bear Stearns, or just another bump on the way to the bottom?
Market strategists point out that there have been 20 instances in the past 20 years or so of the Standard & Poor’s 500 rising 3% or more and all have been during bear markets.
So whatever the market does might have a lot to do with very short term trading sentiment and not any intrinsic appreciation of medium or longer term developments.
The rush is still on to pick the bottom of this particular slump, proclaim it and hope on for the ride.
The AMP’s Chief Strategist, Dr Shane Oliver believes there is a reasonable chance that all the recent volatility – both down and up – over the last few weeks could set up a base for a decent rally in shares in the next few weeks or so.
"Shares have become very oversold and undervalued after big falls since late February, investor sentiment has become extremely bearish with everyone talking about a bear market which is normally a good sign from a contrarian perspective and the fact that US shares did not make a new closing low after the bad news on Bear Stearns suggests that a lot of bad news has already been factored into share prices.
"On top of this there is a lot of short selling of shares in place suggesting that there is plenty of fuel for a rally if the traders who are short have to close their positions. As such there is a reasonable chance that shares have put in a decent bottom for now and will move up for a few weeks or so.
"However, while it is possible that we have now seen the lows in shares for this bear market, we think that it is premature to be conclusive and still lean to the view that shares will have more downside at some point in the next three to six months.
"The next bout of share market weakness when it comes is likely to be driven by non-financials, eg consumer discretionary, materials and industrial shares, responding to the continuing flow of bad news on the US economy and increasing signs of a slowdown in other countries. Australian shares also have to face the added burden from the fall-out from high local interest rates and the strong $A. As such, it remains a time for caution.
"Our assessment remains that the best approach for investors with spare cash is to use the current period weakness to average into shares spread over six months or so as this minimises the risk of getting in too early or too late.
"One thing is looking increasingly likely though and this is that share markets will see some sectoral rotation over the next few months as the problems move on from the financial sector into the real US/global economy.
"After huge falls it looks like the worst may be over for banks, listed property trusts and other financials, but non-financials are now more vulnerable as the economic outlook deteriorates. In Australia, this suggests that banks and LPTs may start to outperform resources. This has certainly been the case over the last few days.
"Whether we have seen the low or not we remain bullish on shares on a 12 month view.
"Valuations are very attractive with shares trading on extremely low price to earnings multiples, some sectors such as banks and listed property trusts are now trading on very attractive dividend yields, big 20 to 30% falls in profits are already factored into share prices, the global monetary backdrop is becoming extremely stimulatory and US fiscal stimulus should also be positive for global growth next year.
"By year end we see share markets being back on to a sustained rising trend.
"Bond yields may still fall a bit lower as global growth slows.
"However, on a one-year perspective, global bond yields are now very low and offer investors very poor returns.
"Australian bonds offer much higher yields which are likely to fall as the RBA moves in the direction of cutting rates some time in the next year and as such Australian bonds should have much higher returns than global bonds over the next year or so.
"The ride for the $A over the next year is likely to be rough as concerns about global growth and commodity prices continue to surface and Australian growth slows, leading to possible interest rate cuts locally in 2009.
"But high commodity prices and still relatively high local interest rates should ensure that the $A remains reasonably strong. Expect a range of around $US0.85 to possibly as high as parity against the $US."
