Why This ‘Double Bounce’ May Not Last…

The last six months saw the double crash on the market.

Now theres a double bounce.

The double crash lasted longer than most people expected.

The question now is whether the double bounce will last so long too, or whether this is just a blip before the double accident resumes

From the end of April through to past due September, the Aussie S&P/ASX 200 index fell from 5,982 points to 4,918.

Over the same time-frame, the Aussie dollar dropped from 80 US pennies to 69.9 pennies.

Since then, both have bounced. The stock index is up 7.4%, and the Aussie dollar is up 4.8%.

The good times are back, correct?

Not so fast. Its not so much because of some thing good thats happened to the Aussie economy, its because of something that hasnt happened to the US economy.

What does this double bounce imply?

Heres a chart showing how the index and the currency possess performed over the past six months.

Source: Bloomberg

You can see the slump and the rebound.

Theres no difficulty understanding the reason why. One of the biggest reasons is that for many of this year, markets possess assumed that the US Federal Reserve would raise interest rates.

That place downward pressure on the Foreign dollar. Thats because the interest rate differential between your Aussie dollar and the All of us dollar would have shrunk.

As for that stock market, falling commodity prices and the fear of a recession pressed the Aussie market lower.

But since the end of September, the Aussie market and Aussie dollar have reversed course. Both are up.

After worse-than-expected work numbers in the US, the markets started to downplay the chances of a US Federal Reserve interest rate rise this year.

For instance, bond futures markets now only factor in the 10% chance of the Fed raising rates this month. Even as August, the marketplaces had priced in a 50% opportunity.

As for the Feds December meeting, the chance of a rate rise has fallen to 38.8%. Thats down from a near 50% chance as recently as August.

So, does this mean an american rate increase is off the cards?

Not so fast

Do it!

As this particular report from Bloomberg notes:

Federal Reserve Vice Chairman Stanley Fischer said the U.S. economy might be strong enough to merit a good interest-rate increase by year finish, while cautioning that policy makers are monitoring slower domestic job growth and worldwide developments in deciding the precise time of liftoff.

What does that mean?

It indicates the Fed is ready (almost) to raise interest ratesperhaps!

And thats just it isnt it?

Regardless of the situation, whether the market is feeling bullish or even bearish, confusion continues.

As Joyce Chang, global head of research from JPMorgan Chase & Co told Bloomberg, the actual Fed should get it over with.

Shes correct. But it goes to show just how anxious the Fed is to do anything whatsoever. It wants a lower marketplace, so it has the excuse in order to restart its bond-buying and money-printing program.

However, after witnessing the crashing markets over the past few weeks, the Fed may now be less eager to engineer a crash. In the event that move was the markets response without an interest rate rise, exactly what could the market do when the Fed does increase rates?

The Fed wants a lower market, however it doesnt want it to go too low.

As for which this means for the Aussie market, well, its anyones guess. Were certainly not about to give up on our crash protection strategy.

In fact, with uncertainty and instability set to continue through to a minimum of the end of the year, now is precisely the time when you should think clearly about protecting your investment portfolio.

The Aussie market has bounced properly. It would be great if it continued higher. But something tells us which investors shouldnt get too excited about a new bull market however.

Bottom line: stay invested, however stay cautious.

Cheers,

Kris.

PS: You can find out the facts of our crash protection strategy here.