Are we headed for a big correction – here’s our take?
The AFR is running an article this afternoon touching on a few stock calls – one of them being Domino’s that we covered in our morning note today – click here – while there’s also talk about bearish predictions for the market providing some history around seasonality, a topic we often speak about – and then around the potential for a bear market from current levels, which is defined as a correction of 20% or more. I’ll touch on these topics in this afternoons note but before I do, a quick recap of our weekly video done yesterday…We talked the usual stuff like the banks, materials, and touched on Vocus, which is trading above the bid price of $3.50 – closing at $3.57 today which implies another bidder might be sniffing around. More on that bellow as well.
A decent session today with the broader market opening weak but recovering – particularly the banks and the energy plays, which saw some bargain hunters come in – the energy coys were interesting - Santos and the like which have looked v average in recent times copped a big bid post early weakness, and although we have no interest there at this stage, STO looks good on the charts after putting in what looks to be a good low. Short term contrarian traders should keep this on the radar over the next few days!
Overall we had a range of +/- 50 points, a high of 5679, a low of 5629 and a close of 5667, up +9pts or +0.17%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Firstly VOC – and this was a response I gave from a Q that posed to me this this morning . Obviously no silver bullet here and we exited the stock for a loss around $3.80 – a poor pick from us at the time however for those that may still be holding…Looks prudent to hold for the next few days - see if a competing bid is tabled. If not forthcoming within say a week, the chances then increase that one won’t come, and given the current bid is a conditional one (premised on VOC meeting earnings guidance) then there is a greater risk that the bid may fall over if earnings slip. They’ll be a lot of scrutiny on VOC during the DD process and if anything is not above board, KKR will likely walk. Expect a response from VOC board shortly however they’ll have to engage as the offer is a credible one.
Vocus (VOC) Daily Chart
Secondly – we know May is a weak month and the mkt dropped 3.3% - June is also weak however July is strong. Currently, the Market Matters portfolio sits in 10% cash, whilst we hold 15 individual stocks, a number that is high for us given we generally run a more concentrated approach. If we look back, at the start of May we held 11 stocks and ~30% cash and have been clear buyers into weakness.
We retain this view at the moment given high cash levels / high caution from investors which is typically not conducive to a major market top. That usually happens when optimism is high, cash levels are low etc – which will come but we’re simply not there yet. We do think a 20+% correction will play out at some stage, but that’s not a big call if we look at history. Here’s a table we put up at the event highlighting bear markets since the early part of the century.
History of bear markets in the US
Key takeout’s are that a 20% correctly plays out every 2.68 years, however the data is skewed somewhat early in the century – so if we strip out that we get a bear market around every 5 years. We haven’t had one for over 8 years, and we’re in the second longest bull market in history (following the one that ran from 1987 to 2000). So clearly, we’re in the mature stages of this current rally, the US is up +250% since March 2009 so we need to be cautious here – and content to increase cash levels / position with a more bearish stance when more signs start to materialise.
History of bull markets in the US
For those that follow our morning note, this chart of the S&P 500 will be very familiar to you – which highlights the maturity of this current run.
S&P 500 Monthly Chart
Have a great night
The Market Matters Team
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