We woke up this morning bright as a button and turned on CNBC. The Dow Jones Industrial Average was down 6%. It recovered slightly before slumping in the last five minutes to finish down by over 7%.
And then we heard the first utterance of the “C” word. It’s amazing that it hasn’t been used more in the last few weeks. But this morning we heard it from CNBC’s Maria Bartiromo, she asked “Is this a crash?”
Here’s your answer Maria, YES.
As we wrote in our weekly update to subscribers of the Australian Small Cap Investigator, all up the S&P/ASX200 is down 37% (actually, 42% taking into account this morning) from its all time peak in October last year.
The Dow Jones is down 40% from its peak. The FTSE100 is down 37% since the peak.
This is a market crash, and don’t let anyone tell you otherwise. The question is whether markets can or will fall further. We aren’t prepared to say it won’t. After all, if you look at the charts, the main global indices have given back nearly everything from the ‘dot-com’ boom and the resources boom.
We all know the ‘dot-com’ era contained a lot of rubbish – the NASDAQ has never got anywhere near the peak again. The resources boom has had much more substance to it, yet was still overdone to some extent.
But we do see the potential for positives? For a start, almost everyone is screaming that this is Armageddon and that we’ll never see the stock market go up again. Remember that markets and people have a tendency to over-react to situations. Second is that private investors need to remember that we aren’t at the beginning of the market downturn. We are already one year further on from the peak, and nearly two years on from when the volatility in the market really started to kick in.
The CBOE Volatility Index (VIX) indicates where volatility started to climb leading up to the current period…
… Since then it has continued to rise. We don’t need a chart to tell us that, but we’ve give you one anyway. And we’ll give you a table as well, which shows the number of 50+ point swings on the S&P/ASX200 for the same period in the last 4 years:
Nearly two-thirds of the trading days in the last three months have resulted in a fifty point higher/lower close compared to the previous day. For the same period in 2005 it was only 9%.
So, the positives are this. How much lower can the market go? Obviously it could go to zero – theoretically. The odds (if you’re a gambler) are stacked against that happening. But the market has crashed through a potentially key support level of 4300.
According to our in-house technical analyst the next support level doesn’t kick in until the 3500 point level. When he told us this a couple of weeks ago it seemed so far away. Now it is only another 600 point drop, which is what the market has done in the last two weeks.
At the moment gold and cash are the King and Queen of investment. For those that have taken their brokers advice and held on to their blue chip portfolios the consolation is that you’ve been collecting dividends along the way.
For those that have gone into an overweight cash position, we are seriously near the time for looking around for value blue chip investments – but not banks!
And for those of you interested in high risk and high return opportunities such as what we look at in the Australian Small Cap Investigator, well, for us it’s business as usual. Nothing changes. We know that investing in small caps has a higher risk premium anyway. And when the market does turn the small caps are likely to lead the charge.
We are looking at three potential opportunities at the moment which we should be publishing by the end of next week.
Cheers.
Kris
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