The ASX200 opened lower yesterday but the “buy the dip” phenomenon that’s been prevalent post the initial coronavirus breakout played out through the morning, early losses turned into gains before the index drifted into 4pm, we ultimately closed down just 0.1% – its hard to argue with the bulls when they cite a mass of liquidity (money) sitting on the sidelines looking to accumulate / buy stocks into weakness. Wednesdays strength was broad based with well over 60% of stocks rallying and if it hadn’t been for a -7% drop in BHP, wiping 33-points from the index, we would have recovered half of Tuesdays aggressive down day.
One very important facet of successful investing is to recognise the trend and what’s driving stocks / sectors whether it be up or down, 2 things caught my attention yesterday:
- The bull market which began in March 2020 is alive and well with investors still buying weakness while the index hovers less than 2% below its all-time high.
- Even on a down day, in a down week, we still saw 8 stocks in the ASX200 make fresh all-time highs and history tells us they are likely to be higher in months to come.
We often talk about the market rhythm at MM simply because both bullish and bearish periods in the market usually last for months as opposed to days, as do periods of sideways consolidation which are actually more common than directional swings. The current 15-month, 3230-point / 73% rally has 3 characteristics we are watching and using to help our overall market exposure:
- The markets enjoyed 2 strong 4-5 months rallies before consolidating, the current leg north has already lasted 6-7 months but we still have no interest in fighting it.
- The first period of consolidation in 2020 lasted 5-months and pulled back 436-points while earlier this year we spent 3-4 months retracing a smaller 315-points.
- We are waiting for another small period of consolidation similar to the one in Q1 of 2021 which may have even started BUT our interest lies in migrating up the risk curve during such a consolidation, not guessing when it will commence.
In summary, It’s easy to sell equities around current all-time highs and move to cash, especially if we read the press who continue to warn of a market plunge because of valuations, rising bond yields, Delta Strain etc. However the fact is the markets sending us a very clear message, the path of least resistance is up as it keeps posting fresh all-time highs, we actually believe money will be effectively lost by investors earning almost 0% from Term Deposits as opposed to being invested in stocks into 2022 at the earliest. I acknowledge we believe this latest advance from ~6500 is maturing but we remain keen buyers the next time stocks experience a meaningful pullback.
Overnight US stocks fell another -1.1% with weakness pretty evenly distributed following comments from the Fed that a decision to reduce stimulus through purchasing bonds could still occur this year, the ASX200 is poised to drop another 50-points this morning with Resources likely to spearhead the early decline. History tells us 2 things which is keeping MM patient / cautious at current levels:
- The S&P500 has moved into correction mode every time its value has doubled i.e. today.
- Fears that the Fed would move from aggressive stimulus to raising rates has caused market hiccups over recent years although longer dated bond yields are ignoring the Fed for now.
MM remains a buyer of weakness across most stock market sectors
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