Iffy times

May's slump initiated a period of volatility on the world's stock markets, with four to six weeks of heavy selling being followed by a marked up-turn as June wore on. It is diffi cult to say at this stage how shares will perform going forward, because so much rests on the tone of the half-year financial results that were due as ACTwent to press.

There's little doubt that the inflation and interest rate worries that triggered the initial sell-off were augmented by a certain amount of profit taking by investors. People who had bought into the markets 12 months prior to this would have seen their cash grow about 10% over the course of the year, based on indicators like the Dow, NASDAQ and S&P 500. T at's a pretty good return given that interest rates and T-Bills would have paid out about 5% over the same period.

The really smart investors would have bought into the heavy equipment sector last summer, because by May this year they would have been looking at about a 60% return, based on the performance of ACT's Heavy Equipment Index. What's more, the really choice stocks like Terex and Manitowoc would have delivered returns of well in excess of twice the principal invested.

But the point is that these profits only existed on paper - the key to making money in the markets is not just buying at the right time, but selling at the right time too. T at's clearly what happened in May. Investors sold heavily to release those paper profits.

The irony is, and it is one of the characteristics of the markets, that such a heavy sell-off leads to shares going from being (perhaps) overvalued to being significantly undervalued. So by the start of June all those stocks that were unceremoniously dumped just a few weeks previously were tantalizing bargain buys.

That seems to be the driver behind June's up-tick. Although prices are not back to the highs of mid-May, they have recovered signifi cant portions of their losses. As our graph shows, all four of the Indexes we track are in the black for the 12 months to date. Even the most subdued, the NASDAQ, is up 4.3% on its position 12 months ago, which is reasonable given the other investment opportunities that are around at the moment.

Outlook

The $ 64,000 question is which way are shares heading next? Unfortunately the answer is not going to become clear until companies start reporting their financials for the fi rst half of the year, and that was not due for a week or two as ACTwent to press.

The tone of those reports and their accompanying full-year guidance should bring some stability to the market, although there may be another correction.