Is the S&P/ASX 200 headed for 6,000?

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.

Why These 3 Blue Chip Shares Are Set to Soar in 2016

Discover The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

Motley Fool writer/analyst Mike King owns shares in CSL, Woolworths, Wesfarmers and Telstra Corporation. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.