The biggest one-day rally for Australian stocks in 18 months lifted optimism towards the market late last week, but one analyst warned the rally could have been just a 'dead cat bounce'.
Australian stocks have slumped over 10 percent since mid-May, sharing in the global market gloom over a potential end to the U.S. central bank's quantitative easing program, but on Friday the index bounced over 2 percent, notching its largest one-day gain in 18 months and raising hopes that the index could be set to recoup some of its losses.
On Monday, the benchmark S&P 200 continued the winning streak after a weak open, rising 0.5 percent by mid-day to 4817.30.
But according to Evan Lucas, market strategist at IG Markets, investors should not get too excited about the rally as major headwinds could keep the index well off the highs of over 5,000 seen earlier this year.
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"In the worst case, if we don't get a rate cut [by the Reserve Bank of Australia] in July and we don't get clarity on the [Fed] tapering issue, we could see the ASX falling to around the 4,650 level by the end of the year," said Evan Lucas, market strategist at IG Markets, referring to an approximate 3.5 percent decline on current trading levels.
"If last week was a dead cat bounce, the global mood change to gloom will continue to see the ASX sliding down the Matterhorn," said Lucas.
Investors are hotly anticipating the outcome of the Federal Open Markets Committee two-day meeting which wraps up on Thursday, where Chairman Ben Bernanke at is expected to indicate the bank's next move.
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If he does hint a slowing of the bank's expansive quantitative easing program, global markets worldwide are expected to sell off as they panic over the implications of a lack of central bank support.
But conversely, if Bernanke were to provide clarity at the FOMC meeting on Thursday, it could take Australian stocks the other way and boost stocks by up to 10 percent, said Lucas.
"If Bernanke puts more issues into the matter and does not provide clarity, this will provide further jitters, but if Bernanke gives some clarity on when the tapering will start, that should provide some stability and we could see the ASX hit 5,200 to 5,300 by year-end," he added.