Banks no sure investment despite meteoric rise

This month has seen a renewed interest in the banking sector, especially since the US announced its latest package to support the financial industry. Of the big Australian four banks, WBC has risen around 19 percent, while NAB and CBA have each risen around 20 percent, with the standout performer being ANZ having risen around 28 percent during March. While on the surface this suggests that the banks are now back in favor, I would question whether this is really the case.

Often investors take a short term view when it comes to the share market. It is common for investors to think that if a stock has been rising for a few days or weeks it will continue to rise, only to find it turns and falls away shortly after buying it. In my opinion, I believe this will be the reality with the banks as they have not proven that the current rise is sustainable, rather it appears to be an overreaction to the news in the US.

The banks have risen too quickly since the announcement and we all know that what goes up fast must come down. Therefore I expect to see the banks fall in price very soon to test their prior lows, and it is only after this that will we get an idea of whether they will move up over the long term or if the current move is just a bear market rally.

So what can we expect in the market?

The Australian share market has now been rising for fourteen days and over 19 percent in price in the longest move up since the bear market started in November 2007. As I mentioned last week, volume has also increased which is a good sign as it suggests that the current up move is sustainable at least in the short term.

That said I believe the pace at which the banks have risen in recent times is unsustainable, therefore we need to expect that price will fall away in the next one or two weeks. The longer and faster the market continues to rise in this current move, the higher the probability that when it turns to test the low achieved on Monday 9 March, the bigger and faster the fall will be.

I still believe the market will rise up into May or June of this year to between 4500 and 5000 points although it is possible that the rise may be longer in time and higher in price but only time will tell. Right now I would caution investors against getting caught up in the market hype and investing all of their money in an attempt to regain the losses of the past few years. It is far wiser to take a staged approach to entering the market and to use sound money management rules to protect capital.

Dale Gillham
Chief Analyst
Wealth Within

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