Markets correct – Is this the “big one” we have been targeting?
From James Gerrish, Primary Contributor
I wrote to you last week suggesting that a decent inflexion point seems to be looming in markets and that has clearly played out with some force over the past couple of days – perhaps more aggressively than I had envisaged! Yesterday we saw the ASX 200 down -166pts / 2.74% closing on the lows of the day at 5883.
ASX 200 Chart
I’ve been looking for a major market decline for some time and going into the drop we had bearish facing ETFs’ on our portfolio and a reasonable cash position of ~15% , the majority of which we spent into yesterday’s market decline. While the portfolio was in the red yesterday, having cash to buy weakness and a hedging positon in place, we did better than the market, and we’re now positioned for upside.
At around lunch time today the ASX is down 5% on the week – the total sell off from the 6373 high set on the 30th Aug is now -490pts / -7.68%. Clearly a big drop and we could fall further. The DOW Jones has fallen -2052pts to the close this morning or a similar ~7.61%. Worth noting that we do often see big falls at the start of October and more often than not, that provides a great buying opportunity ahead of the most bullish period into Christmas. Time will tell, however that’s our current view, and we played that view by buying stock yesterday when the majority were selling. If we’re wrong, we’ll put our hand up and take our medicine, however when I’ve stepped up at times like this in the past, ‘buy the panic’ has proven to be the right call. It’s a hard thing to do, and quite frankly pretty unconformable.
Today the market has settled in Australia and around the Asian region despite the Dow Jones falling another -545pts overnight. The obvious question is, what now?
1 – Where is the markets likely “bottom” – our preferred scenario is we now see a choppy period of consolidation.
This implies we should still buy panic weakness but be prepared to increase cash again into strength
2 – Is this the “big one” we have been targeting? Looking at assets other than equities suggests not. This is an equity correction at this stage, we’re not seeing any concerning movements in the credit markets that matter. Some high yield credit spreads have widened a touch, but not significantly so. Panic is focussed in equities which implies this correction stems from growth concerns.
While the fundamental picture has not changed, the aggressive nature of selling paints a negative technical picture. This is not generally that surprising i.e. mixed signals during corrections between fundamental and technical measures. I prefer to take the technical view on board into market panic, given that price action can often be a strong leading indicator for a change fundamentally. i.e. equities pricing lower global growth etc.
For now, we have allocated a large portion of available cash into stocks and some select ETFs. We plan to retain our leveraged short exposure on the US market through the BBUS for now (this position was up ~10% yesterday), however we’re vigilant that the aggression of the sell off and the volume was strong. While we’ll give the market the benefit of the doubt for now, but reserve the right to go to high cash if the outlook deteriorates.
Why such aggressive selling?
Thinking about the reasons underpinning this pullback, there have been two major pieces of global macro-economic news that have gathered momentum over the last few days to undo stocks i.e. rising US – China trade tensions and increasing bond yields (interest rates). Not fresh news but very significant with regard to share price valuations.
In my opinion, the Australian markets is around fair value but US stocks remain “rich” even after the last few days carnage.
Remember 3 facts from the September Bank of America Fund Managers Survey:
1 – Cash levels are at an 18-months high hence the buy buttons will be pressed at some stage leading to a strong bounce in stocks.
2 – Allocations to US equities was at an aggressive 21% overweight level – clearly the US has some room to underperform
3 – Allocations to emerging markets were sitting at 10% underweight, compared to 43% overweight in April, at the lowest level since March 2016 just before stocks soared.
I simply think that investors have been treating US stocks as an almost “safe haven” over recent months, a positioning fraught with danger and I add one we still believe accurate.
Clearly, some existing times ahead for markets with opportunities aplenty for the active investor. I encourage you to once again take a free 14 Day Trial of our service – CLICK HERE.
Have a good Weekend
James
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