Despite today's 0.3% fall in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), the index is still up 8.8% since a low of 5,051 set on June 28.
Could we see the market power higher and hit the 6,000 mark?
Here's what I think needs to happen for that to occur.
Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) make up around 26% of the index. Given their dominance, any change in sentiment towards the banks is likely to see them move higher.
Investors would need to be satisfied that APRA capital requirements aren't as onerous as the market thinks and that the bad debts cycle won't be as bad as initially thought. If the banks have a solid reporting season, we could certainly see that.
A strong rise in commodities prices, particularly iron ore and oil would be good news for BHP Billiton Limited (ASX: BHP) – which amazingly is now ranked our sixth-largest company behind the banks, Telstra Corporation Ltd (ASX: TLS) and biopharmaceuticals company CSL Limited (ASX: CSL). Given BHP's dependence on those two commodities – where their prices go, so too will BHP's share price.
Telstra is currently trading at $5.80 – not far off its 52-week high of $6.53. The telco could hit that price if it too has a stellar reporting season next month. Watch for any announcements of capital returns or share buybacks that the company has hinted at in recent announcements. That could see the share price soar.
CSL is unlikely to smash market expectations, with analysts expecting a modest increase in earnings per share this year. Trading on a trailing P/E of over 30x already, it's unlikely that we'll see big gains in CSL's share price from the current $119.
Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) are ranked eighth and ninth in the index respectively. Wesfarmers' share price is already pricing in a decent result from its operations, while Woolworths could surprise on both the downside or upside. A price war between the supermarkets probably won't help either.
There's only one other alternative I can think of – if the top 10 companies don't perform well. And that's for those second-tier or mid-cap shares to continue driving the index forward. As I noted earlier today, the S&P/ASX Mid Cap 50 index has jumped 14% over the past year.
Foolish takeaway
The index has rallied hard despite the various problems global markets face. That's the problem with ultra-low and negative global interest rates – capital needs to find a home somewhere where it can generate a return – and there's no sign of rising interest rates as yet.
