Its funny (well not really) how marketeers call a heavy fall a "correction" Perhaps this is supposed to alleviate some psychological pain that a lot of people experience during times like we have been having.
If you were attracted by the headline of this newsletter, hoping for a prediction, you are either new to me or forgot that I believe the market is not about predictions but probability. So what’s probable with what’s been happening? Are more falls, consolidation or a solid rise on the cards?
Crashes tend to come when there has been a sustained fast uptrend, like we had between 2003 to 2008 shown in the monthly chart below. Using a numerical perspective the index rose around 120% in 5 years.
The end of the GFC was in 2009, that’s 6 years ago and the index has been in a relatively slow uptrend and risen 60%, so at around half the pace that it did during the bubble years leading up to 2008. So it would appear we do not have a bubble, at least compared to 2003 to 2008. In fact it’s the concern that despite all the assistance the markets have had with low interest rates and credit stimulation that they have not bubbled up further to create healthy inflation! The recent devaluation of the Chinese currency and now the US stalling on interest rate rises is an admission that things are perhaps not as good globally as first thought. The market’s reaction? SELL.
My opinion is the markets are REACTING to short term news, and the market is not in a bubble crash mentality. I also think we would need to see the index fall below that trend line starting in 2009 before real panic set in, so 5000 points appears to be a strong line in the sand for the Aussie market.
Below is a weekly chart of the XAO, representing our top 500 stocks. It's the same index as in the monthly chart but looks a lot more volatile because it’s a shorter time frame. It also shows a different trend line sitting around 4700. Nothing can be discounted and experienced traders and investors know that the unexpected is more the norm. A saving grace is the volume indicator above the price chart. It looks supportive but all bets are off if that volume support line breaks down.
Markets only really do 3 things, go up, down or sideways. In the last week the markets have found support with some heavy buying, however there remains much uncertainty overseas. Until that uncertainty clears a sustained rally within the broad index isn’t likely, that leaves the other option.............a sideways market for a while or at best a return of the slow (but bumpy) uptrend of the last 6 years.
This is not an easy market because not everything is going up. Investors need to focus on stocks in uptrends with good fundamentals. A lot of "favourites" in the index have disappointed. Strength still appears to be in health, telephony, utilities, property and some financials, so things are not bad, just jumpy.
Stay focused, diligent and stick to the plan. Now is a great time to honestly review your trades. I can assure you that if you do have a method and are trading it, operator error will be the thing that has impacted your results more than the market. Try not to feel too bad about your failures, it’s been an emotional and testing time for many. Reviewing your trades does wonders for not just your system and your psychological guidelines, but will also give you back a feeling of control. Essential for you to carry on with a positive attitude.
Until next time
“The ability to observe without evaluating is the highest form of intelligence.” ― Jiddu Krishnamurti