Good trading and investing takes nerve. Today, the Australia 200 index reached a level where in my view it is a clear "BUY". I fully expect to wear a lot of flack for this call, just as I did when I called the market a "SELL" at 5922. Nonetheless, here are the reasons why investors and traders should have a long hard look at buying at current levels:
1) The index is at dividend yield support. The yield on the weighted basket of stocks that make up the 200 index is around 4.8% PLUS franking.
2) The whole China bear story is at extremes - markets are now selling BECAUSE the Peoples' Bank of China is stimulating the economy. This logic is tenuous at best.
3) Industrial commodity prices are at or near lows. See point 2.
4) The potential for further USD strength in the near term is in my view limited. A 25% rise in the US Dollar index over the last year suggests a rate rise in the US next month is baked in. Instead, markets could sell the fact. A falling USD could start a scramble for non-USD assets. Guess which market has the best dividend yield across the Asia Pacific region? (See point 1).
5) Bank capital issues are now priced in. The other three major banks are steady today, despite the announcement of a billion issue from CBA.
6) The technical picture. Here's the daily chart:
Have a look at that 5400 support!
7) The reward to risk ratio at these levels. Here's the weekly chart:
I see major support at 5250 (minus 150 points) and 5100 (minus 300 points). On the flipside, the upside target is 6000 (plus 600 points). This gives reward to risk ratios of 4:1 or 2:1. Fits my trading plan.
None of us know the future with certainty. As a trader, all I'm trying to do is keep taking higher probability trades with good reward to risk ratios.
What do you think?