Even though the US market ran strongly on Friday there are doubts still lurking. Whilst corporate earnings are pleasing more than they should, realistically valuations are overstretched. The markets are now being fuelled by investors – private and fund managers – who are “trying to get ahead of the curve”. There is always an element of factoring in, an outlook some several months ahead – in either direction. And right now a perfect economic outcome is being anticipated. That is by no means an economic certainty.

The US will be in deficit for some years yet, deflation fears still abound, growth in corporate earnings is still only isolated and not widespread thus a rebound in consumer growth is unlikely to be seen before the New Year – especially with unemployment at 6.4%.

Those market players that are currently pushing the markets higher are of course “right” – the market is moving on and up. The smart ones will be ready to bale out when the first sign of weakness appears leaving behind the players late to enter. This tenet applies universally and that is why I take a cautious view of my own positions.

Australian corporate reporting starts this week and it is unlikely that earnings will be as buoyant as in the USA if only because of the impact of the firming Australian dollar.

Two months ago in the early stages of our newsletter – at the early stages of this mini bull run – I expressed a view not so popular at the time that we were seeing a significant turnaround. It was a contrarian view then and right now I take the view it is time to take a contrarian view and this time it is caution. If you enter the markets now it is more risky as the downside risk increases the higher we are from that low of mid March. Watch volume closely – since July 9 the Australian market has moved higher but the volume trend has been down. There is less buying push - the big players are not buying like they were over the previous two months.

I have been investing in the markets for some 20 years now and on many occasions I have entered the market as the hype develops momentum only to find not long after the market dies. I have leant to say no and wait – there will always be plenty of safer “good times and good buys” – it just takes discipline and perseverance to discover them. These times may not be that far away – be patient and wait for a solid retracement and then a more confident move higher.

I am happy to stay on board those stocks that I entered early – the “trend is my friend”. I would be cautious to buy many stocks in the so called blue chip category right now and would be culling any doubtful stocks. I still hold the view that generally banks are looking soft as are other majors FGL, FXJ and TAB to name just a few. As I mentioned last week this is a good time to look at Options and even if you are not ready to invest using options at least try and paper trade some in this stage of the cycle.

The sectors I mentioned last week - Consumer Discretionary, Energy, Mid and Small Caps, Materials and Industrials are still sectors where I would be looking for opportunities. But again with caution as all of these had a great run last week. Some stocks in these sectors will still have plenty of steam left in them even in an overall market retracement.

Some stocks have developed short term momentum in the expectation of a special dividend or similar – for example BHP Steel, Telstra – whether any long term rise in their share valuation is sustainable – will depend entirely on their underlying earnings and not a once off payout.

Enjoy the Ride.

Tom Scollon