The Point of Maximum Pessimism

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Phew! What an exhausting month.

On the last day of July, the S&P/ASX 200 index closed at 4,424 points.

On 9 August the index reached an intra-day low of 3,765 points.

At the close of trade on Wednesday the index closed at 4,296.

As you can see on the logarithmic chart below, the stock market action this month has been the most volatile this year:

stock market chart
Source: CMC Markets Stockbroking

 

In fact, for a similar sized percentage move you have to go back to April last year. Funnily enough, that too marked the approximate end of a period of U.S. Federal Reserve money-printing.

And now the market is waiting for the next central bank move.

Not surprisingly, the market has gone all topsy-turvy.

What’s good is bad, and bad is good

Economic news that’s normally seen as positive is now seen as negative. Why? Because the market fears it may stop the Fed from printing money.

Not only that, but bad economic news is cheered… because it increases the chances of money-printing… and that’s seen as a good sign for the markets and the economy.

For example, this from Bloomberg News:

The dollar rallied, Treasuries rose and U.S. stocks swung between gains and losses, as the manufacturing report bolstered optimism in the economy while dimming prospects for more monetary stimulus from the Federal Reserve.

It’s crazy. Positive news should be positive for stocks. But these days, that ain’t always the case.

The only explanation we can come up with is this…

A genuinely self-sufficient market will take months and possibly years to recover and grow. But – and here’s the key – it will be sustainable growth.

By contrast, a central-bank-induced “recovery” will hit the markets right now, like a big shot of coffee. But – and here’s another key – it’s not sustainable. Just as the effects of previous stimulus soon wear off, so will this one.

And traders who have gotten into the market on the basis of more stimulus know this. That’s why they’re getting out on any signs of positive economic news.

However, they needn’t be so nervous. Because we’ve got some news for them…

Fed meddling is certain

Action by the U.S. Federal Reserve is almost guaranteed. Meddling is what these guys live for. But we understand traders’ nervousness. When they’re punting with huge leveraged bets the last thing they want is to be in the market while other traders are selling out.

That’s what’s making the market hyper-volatile.

And if you’re in any doubt about the impact of stimulus on the real economy, it’s worth noting the following quote from the Financial Times. Because not everyone is happy about the outlook for the economy:

In many countries, the surveys of purchasing managers produced the lowest readings of manufacturing activity, orders and jobs since mid-2009, when the world economy was crawling out of recession.

To us, the situation is clear: for as long as policymakers continue to meddle and try to boost the economy, the longer the economy will stay depressed.

Yes, it may help the stock market in the short term by artificially inflating prices. But long term, it will do no more than disappoint investors.

And eventually investors will get so used to the post-stimulus disappointment they’ll forget to get excited about the stimulus beforehand. That’s when you’ll know the market is at the depths of the depression.

And that’s when the market will be at a genuine bargain price. Famous investor John Templeton only bought stocks when the market reached “the point of maximum pessimism”.

In 1939 it reached that point. He bought stocks. He made a fortune. But not straight away. It took time. Central bankers aren’t interested in taking time. They’re trying to bag a quick fix.

And that’s what’s creating the volatility and distortions in the market.

So right now, some individual stocks are at “maximum pessimism” prices and are worth buying. But the market as a whole isn’t.

That will only come when investors are no longer fooled by the magic charms of central bankers.

Until then, the action you’re seeing now is nothing more than a trading market. That’s great for traders. And great for punters. But it’s not so good for the conservative investor who’s just trying to save for retirement.

And by our estimates, it seems the market is set to stay this way for a while yet.

Cheers.
Kris

Publisher’s note: Something else that’s “great for traders”: Murray Dawes’ latest market update video, posted on YouTube on Wednesday. If you haven’t watched it yet, go here now. It’s rare that an experienced trader will give his insight away for free. So while he’s happy to do it, you should lap it up! For Murray’s latest overview of the market… and an idea of where he thinks it could be headed next… click here.

 

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here.

 

Official websites and financial e-letters Kris writes for:

(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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21 Responses to “The Point of Maximum Pessimism”

  1. TRB

    What is my experience Drood.
    Sad stories of real old people suffering mental illness and homeless.
    All they need is few seconds of somebody saying hello and giving them some cash.
    They don’t need massive administration infrastructure and some inexperience young overpaid case managers telling them what to do.
    As a trader I will not invest in a company that spends over 40% on administration costs and same with any charity.
    I think most traders would think the same way.

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